‘Best way to attract foreign investment is political and economic stability’

Portugal is striving to become a go-to proposition for investors, reports Vanessa Sousa.

To continue being a magnet in terms of attracting foreign investment, Portugal needs to remain politically and economically stable. This is the vision shared by Minister of State, Economy and Digital Transition, Pedro Siza Vieira, in an exclusive interview at the Lisbon REInvestment Talks, which took place in November on the REALX.Global digital platform.

“The best way to attract foreign investment is to promote political stability and have an economic environment which facilitates growth and the best possible investment returns,” said Siza Vieira. Recognising the importance of international capital for the development of the Portuguese real estate market, he further explained that “what we have in Portugal is a demand which is very high for quality real estate, and it will continue in the future”. 

The country’s characteristics such as safety, excellent healthcare and education, its openness and the fact that it is one of the 27 members of the EU have combined to reinforce its position as an international investment destination.

“During the last few years, we have witnessed the growth of economic activity as well as that of international investment and foreign talent. We have developed a technological environment that is attracting talent from all over the world,” added Siza Vieira during the event, organised by Iberian Property and Real Asset Media. It is for these reasons Siza Vieira believes that “with political stability I hope that we will continue to be the preference of the international investors”.

Above (l-r): Antonio Gil Machado, publisher, Iberian Property; Carlos Moedas, Calouste Gulbenkian Foundation; Roger Maxwell Cooke, board member of Lar España Real Estate, senior adviser to Ernst & Young, president of the British Chamber of Commerce in Spain

To promote economic stability the government is working on a “balanced” 2021 State Budget, which will include “extraordinary expenses to mitigate the consequences of the pandemic”, continued support for the most impacted sectors such as tourism and cultural activities with adjustments to their VAT, and also an effort to “regain our pace in terms of debt reduction as soon as the situation is normalised”.

On the other hand, Siza Vieira suggested that “we will use the EU funds, which will have no impact on the public debt, to stimulate the economy”.

Crises build the European dream

Covid-19 has accelerated certain trends in real estate. For Carlos Moedas, administrator at the Calouste Gulbenkian Foundation, some accelerations in a crisis can be good, others not so good, but one thing is certain: “Crises are good in terms of building the European dream because Europe only advances through crises. If there is no crisis there is no advance.”

In terms of positive advances, there is digitalisation, which up to now “had found resistance from all of us and, suddenly, we had no other choice than accept it”, said Moedas, adding that becoming more digital does not mean disregarding physical meetings, but “you will taste and value them more than ever”. Overcoming this ‘wall’ between physical and digital was one of the tasks he developed during his five years at the European Commission, where he was EU Commissioner for Research, Innovation and Science.

‘We have developed a technological environment that is attracting talent from all over the world.’

Pedro Siza Vieira, Portuguese Minister of State, Economy and Digital Transition

Another important advance is sustainability. Moedas said “we have more than 25,000 billion sq m in Europe that need to adapt in terms of energy efficiency and in terms of the ways we look into the construction business”. He adds that “the whole transformation in terms of sustainability, for the construction business, is bound to happen now”, due to pressure from people, politicians and the EU itself, which continually issues guidelines to achieve it. 

“The sustainability angle is our future. So, get ready for it,” he told the real estate experts at the event, which together, represented more than €20 billion in assets under management.

But not all accelerations in times of crisis are positive. For example, Moedas sees the acceleration of the powers of the state as a negative. “The state is now invading us and our privacy. Once the state gets power it will never give it back, just like taxes.” 

On the other hand, there is a set of supranational powers which are growing and are necessary. “Crises provide a little more power to the EU. We have instruments that were created during the last financial crisis that gave more power to the EU. I believe that after this crisis there will be more mechanisms which will give more power to the EU in terms of public health coordination. That makes good sense. There are powers which need to be on the national level, but the coordination powers should be on the supranational level,” he explained.

Opportunities and challenges

Different real estate segments have seen contrasting reactions to the effects of the pandemic. The truth is that, for now, it will continue to be “very difficult to take long-term decisions” and, according to Eric van Leuven, managing partner, Portugal, at Cushman & Wakefield, despite 2020 already being set as the third highest year in terms of investment, with €2.3 billion traded up until September, it is clear that the “market recovery is taking place at a slower pace than anticipated”.

According to van Leuven “the investment activity slowdown was due to the expected drop in NOIs and tougher finance terms”.

After the pandemic, there will be scars that remain, said Paulo Silva, head of country, Portugal, at Savills. Rejecting the idea that offices will end, Silva said there will be an adjustment in the market instead.

‘We try to make projects in the best locations, but adjust to the opportunities the market presents us.’

Cristobal de Castro, Albatross Capital

“The trend is flexible work, a combination of work at offices and work from home. Investors will have to take into account this new reality”, which will require larger offices and new uses for them. Silva also anticipates changes in retail, with a combination of physical and virtual spaces and the use of omnichannel strategies. But he admitted that in the long-term the segments that will suffer the most will be shopping centres, hotel owners and their operators, as well as landowners.

It is already possible to recognise the segments that will benefit from the crisis. Francisco Horta e Costa, managing director, Portugal, at CBRE, pointed to some of the winners of the crisis, which include:

  • income-generating assets in core markets, which allow “investors to get away from risk” 
  • regional hubs next to big cities 
  • equity buyers, distressed real estate funds and family offices which “will invest more in RE and will have more opportunities”
  • land buyers, because “land prices will be adjusted to a scenario where it will be difficult to get credits and financing for development”
  • warehouses and logistics, because “for every €1 billion of e-commerce we need 100,000 sq m of logistics space, so we will need a lot more logistic units in the coming years”
  • supermarkets
  • retail parks
  • healthcare
  • data centres
  • agricultural
  • residential, especially the build-to-rent market.

Housing: opportunities dictate investments

In terms of housing investment, experts at the talks revealed that opportunities dictate when and where to invest, showing openness to invest in cities other than Lisbon and Porto and in other segments besides prime.

Albatross Capital’s managing director, Cristóbal de Castro, said the company’s goal is to cover the whole housing segment. The company, which formed a joint venture with Quântico, has 14 developments in Portugal – 11 in Lisbon and three in Porto – and suggested it will invest again when it finds “best risk returns opportunities” in the country.

“We are open to different strategies. We try to make projects in the best locations, but adjust those projects to the opportunities the market presents us,” said de Castro, who also revealed he plans to not only invest in the luxury sector, but also in housing for the middle class. 

The REInvestment Talks combined a physical event with online feeds  

A similar vision is shared by VIC Properties’ COO Luís Gamboa. “We don’t just look towards big projects like the Prata Riverside Village, we also look into smaller projects with 5,000, 10,000 and 20,000 sq m. It is all a matter of opportunity,” he said.

The company has its sights on other locations to invest in Portugal, besides Lisbon: “We want to see other municipalities like Porto, around Porto, Algarve and others.” He added that VIC Properties “does not have a specific segment” when it comes to housing, but said it is within the “middle class segment that demand is concentrated and, as such, we are taking that market into consideration, to grow”.

On the other hand, Fernando Vasco Costa, managing director at Nexity Portugal, revealed that the French company is analysing other investment options in terms of the Portuguese housing market, such as build-to-rent. This model “works very well in France, where we sell 50% and rent 50%. In Lisbon, we are studying that possibility”, taking into account risk measures and incentives.

Construction industry needs to gear up for tech-enabled future

Innovation will transform real estate for the better, Carlos Moedas, trustee of the Calouste Gulbenkian Foundation and former EU Commissioner for Research, Science & Innovation, told the Lisbon REinvestment Talks, writes Nicol Dynes.

“Real Estate will undergo a radical transformation in the next 10 years,” said Moedas. “In Europe there are 25,000 billion sq m that need adapting to become sustainable and energy efficient.”

The path is set now and “digital and green are the two directions to go in”, he added. The construction industry must therefore transform to become sustainable, investing in technology and adopting environment-friendly, recyclable, innovative materials as well as new building and waste management methods. 

“It will need to make an extra effort, more than other industries, in order to change people’s perception,” Moedas continued. “The key to successful innovation is to bring people from outside the industry to bring new ideas and a fresh perspective. So far it’s been the researchers, the labs and the engineers that have brought about change rather than industry leaders.”

There are good examples of smart projects in cities such as Copenhagen or Grenoble and it would be beneficial to “bring together all the individual examples of innovation in different European cities”, added Moedas. 

‘The merging of the digital and physical world has become inevitable now and in 10 years we’ll realise how beneficial that was.’

Carlos Moedas, Calouste Gulbenkian Foundation

In Portugal tech start-up Veniam has set up a ‘living laboratory’ in Porto, under which more than 600 vehicles are monitored daily so that urban planning can be improved. 

The pandemic has accelerated and even forced the adoption of digital solutions in schools, universities and hospitals as well as in the work environment, which had been resisted for years.

“The merging of the digital and physical world has become inevitable now and in 10 years we’ll realise how beneficial that was,” said Moedas. “You appreciate the digital, but at the same time the physical experience is more valued and prized.”

Innovation and technology can be used to connect the physical and the digital world. It is not an either/or choice he said: “You need to be comfortable at the intersection of the physical and the digital, you can’t just inhabit one world.”

Investment in Portugal stays buoyant amid pandemic

Despite the crisis caused by the pandemic, transaction volumes in Portugal are close to historic highs, delegates heard at the Lisbon REinvestment Talks.

“Real estate transactions have reached €2.3 billion to date, which is more than the same time last year and the third historical high ever recorded,” said Eric van Leuven, managing partner, Portugal, at Cushman & Wakefield. “By the end of the year, we expect the total to reach €2.7-€2.8 billion, less than the €3.3 billion recorded in 2019 but not dramatically less.”

The reason is that the year started with a bang in the Portuguese market but the market came to an abrupt halt when Covid-19 hit. Q1 continued the positive trend from 2019, with the highest take-up ever, record volumes and significant interest from international investors. Q2 coincided with lockdown and there was a tentative recovery in Q3.

“The recovery has been slower than we anticipated,” said van Leuven. “We were hoping to be back to normal by September, but it hasn’t happened. Demand is slowly recovering after months of suspension of all decision-making.”

‘We expect investor interest to pick up in 2021 and there’s certainly no lack of liquidity in the market.’

Eric van Leuven, Cushman & Wakefield

The transaction numbers are positive, but skewed by a couple of exceptionally large deals in Q1 before the storm: the sale by Sonae Sierra and APG of 50% of the Sierra Prime portfolio to Allianz and Elo (the Portuguese portion, comprising four shopping centres, is worth €800 million); and the sale of Lagoas business park in Lisbon to Henderson Park for €421 million.

“We expect investor interest to pick up in 2021 and there’s certainly no lack of liquidity in the market,” said van Leuven. “But there will be a flight to safety and quality and a steering towards less risky assets and sectors like offices, PRS and logistics.”

In this environment there will be winners and losers, experts agreed. “The definite winners will be core markets, income-generating assets, regional hubs, equity buyers and distressed real estate funds,” said Francisco Horta e Costa, managing partner, Portugal, at CBRE. “Family offices will also be winners, because they are cash-rich and agile and now that they have fewer alternatives they are paying more attention to real estate.”