Portugal tops in 'all property'
The investment market in Portugal remains buoyant, with continuing strong demand pressuring yields. If, as expected, interest rates remain static and the economic recovery progresses, property will continue its strong performance.
Institutional investors dominate the market. Foreign funds acquire the major retail schemes, led by the German (for example, CGI) and Dutch (ING, for instance). Portuguese property funds and pension funds are very well established and they tend to acquire the majority of office and industrial properties, particularly in the sub-€30m sector.
In terms of investment volume, the retail market remains the chief beneficiary of investor demand and is expected to continue to outperform other sectors in the medium term, as the occupational markets within the office and logistic sectors remain timid.
The IPD Index demonstrates that during the three-year period from 2001 to 2003, Portugal delivered Europe’s highest ‘all property’ returns, averaging 12.2% per annum. This was largely supported by a strong annualised performance from the retail sector (14.8%) and to a lesser extent the office (7.8%) and industrial sectors (10.8%).
There has been only a trickle of properties transacted on a sale-and-leaseback basis, largely due to the prevailing low cost of debt available to corporate owner-occupiers and the common preference for ownership of real estate by Portuguese businesses.
Since the establishment of the European Monetary Union, Portugal has attracted many foreign investors, primarily within the retail and office sectors. Foreign investors with an interest in Portugal include CGI, ING, CSAM, LaSalle Investment Management, DB Real Estate, DEKA, Standard Life Investments, Pillar Properties, Pricoa, GE Capital Real Estate, US Teachers Pension Fund, Siemens SKAG, TMW, MEAG, Oppenheim, IVG, Predica, Segece, among others.
In the office sector there are encouraging signs within the office occupier market, evidenced by a significant increase in take-up during 2004, albeit not sufficiently to deliver rental growth. Returns will continue to be driven by yield movement as rental growth is expected to be delayed until 2006.
Portuguese property and pension funds have taken a more maverick approach, demonstrating a willingness to acquire older property, often with some vacancy, albeit commonly underwritten by rent guarantees.
The largest recent transaction was the sale by French developer, Nexity, of the new Amoreiras Plaza office/retail project. It was acquired by Spanish private investor, Pontegadea, for around €60m.
Retail property continues to be the most sought after sector. A tightly held market and supply shortages have encouraged more institutions to become involved at an earlier stage, by forward funding or forward committing to schemes under development. ING has pre-committed to acquire AM’s new schemes at Viseu and Coimbra and DB Real Estate has pre-committed to acquire Forum Madeira, AM’s scheme on the island of Madeira.
There is increased interest from Portuguese funds to acquire retail schemes. However, the limited size of the local funds restricts their purchasing capabilities to the sub-€75m sector. Hence the larger retail complexes will continue to be acquired by foreign investors.
Apart from AM (Dutch), the dominant retail developers are Portuguese companies, including Sonae Imob., Amorim Imob. and Mundicenter. The retail park market remains relatively embryonic. There are seven established parks (with a collective lettable area of 120,000m2) and only another two parks expected to be complete before the end of 2006.
There is considerable further potential for growth in occupier demand as further international retailers expand into Portugal and with the introduction of food and fashion to this retail format. There is an ever-increasing pool of institutional capital seeking to acquire retail parks, led by the English, Dutch, German and French funds. This considerable weight of money, along with the current shortage of investment stock, continues to place downward pressure on yields.
The Portuguese industrial market is very small and occupancy demand for modern buildings is limited. Additionally, much of the existing industrial property is outdated. Consequently, institutional investment opportunities are few.
Matthew Walker is an investment partner at Cushman & Wakefield Healey & Baker, Portugal