• Max Hagelstein

Lisbon - Land of opportunity for real estate investors

Guess the European city where Alphabet (Google’s parent company), Amazon, Huawei, Cisco, Natixis, Euronext, Mercedes and Volkswagen have all taken office space in recent years. Did you give the correct answer, Lisbon?

In 2019, PwC’s Emerging Trends Report ranked the city as Europe’s top real estate investment destination citing its ‘quality of life’. A low cost of living, culture, restaurants, good transport links and custard tarts (surely the main driver?!) are sucking in young talent at a rapid rate. Portuguese students who studied abroad are returning in droves. Many speak foreign languages, and around half studied engineering or math-based subjects. The tech giants have noticed.

The Portuguese government is playing its part too. From accelerator funds for start-ups to the Non-Habitual Tax Residency Regime that aims to attract high-net-worth investors to the country. Portuguese GDP was forecast to hit 1.6% in 2020 – far higher than the EU average. True, like in all markets, COVID-19 could well put things on ice for a while. But once growth resumes – as it surely will – Lisbon’s underlying dynamics and focus on the tech and medical sectors mean that opportunity won’t wane for real estate investors.

From a COVID-19 perspective Portugal has actually been faring better than most other European countries, so far at least. The number of people infected per capita is around 0.06%, which is considerably lower than in the UK, Germany, France, Italy, Spain and the Netherlands where the figure is about 0.1%. This is testament to the Portuguese government introducing social restrictions early when the number of COVID-19 cases was still relatively low. Political continuity and strong economic growth in recent years also means there haven’t been largescale public health cuts, ensuring the country’s healthcare system is better placed to face the crisis.

Turning back to the investment backdrop in Lisbon, Grade A office space is in short supply thanks to the surge in demand from multinationals. Rents for prime Lisbon offices were forecast to rise from €24 per sq m to €26 per sq m this year; and regardless of adjustments post COVID-19 will likely remain well below comparable rents in most other major Western European cities, by approximately 40%-45% on average. This will both support demand from corporate tenants and create a positive environment for developers. The Portuguese office market is also comprised of relatively aged stock, so opportunities for redevelopment, conversion and refurbishment are abound.

In contrast to many other markets, high street shopping remains part of Portuguese culture. E-commerce penetration has to date remained low, with only 39% of Portuguese who use the internet shopping online versus an EU average of 63%. As a result, investors are repositioning retail assets for the future. Job creation from the arrival of multinationals, relatively affordable wages and growth in tourism have also supported retail. At Rivercrown we are looking at a number of retail assets in Lisbon - from both a debt and equity perspective. We believe that these are often undervalued and can be transformed into mixed-use destinations with greater concentrations of leisure and F&B, for example.

Tourists and business travellers are flocking to Lisbon. Before COVID-19, Portugal’s travel and tourism sector was forecast to grow 5% per annum. Twice the EU average. We expect the trend to continue in the long term and boost demand in the hotel sector, which we are also looking at. Interestingly, many well-located hotels in Portugal are high-net-worth or family owned and often under-managed. As a result, we expect a window of opportunity to open for some of these to be repositioned into a more global product.

There is a ‘but’ to investing in Lisbon real estate, however. Finding good opportunities in scale is challenging. Part of what makes the market attractive is that it’s not as transparent as more institutionalised markets like Berlin, Paris or London. Whilst this means less competition, it also means ‘on the ground’ expertise is essential for unearthing scale and value. A lot of real estate in Portugal is privately owned by a relatively small number of local players, not international investors. Transactions are often ‘off market’ too.

Rivercrown’s team comprises local experts who know the market inside out. Their expertise helped us to acquire a controlling stake in Maxirent, a closed-ended real estate fund listed on Euronext in Lisbon. The fund has gross asset value of in excess of €100m, with more than 90% of this concentrated in nine high-quality assets in Lisbon.

As part of the expansion of our Iberian footprint we acquired Refundos, Maxirent’s fund manager. The vertically integrated regulated investment enhances our ability to access opportunities that non-local investors would struggle to find, across the multiple business lines in which Rivercrown is active.

Although Lisbon has traditionally been overlooked by institutional investors in comparison to other European cities, this is unlikely to last. Invesco, Patrizia, Axa, Generali and a host of other global institutional investors are now active in or are aggressively targeting Portugal. 2019 saw record investment flow into property in the country. Increased interest from international capital will result in greater competition, but the opaque nature of the market means those with local teams will be best placed to benefit.

When COVID-19 abates, investors with the right market infrastructures will be rewarded with superior risk-adjusted returns.

Max Hagelstein heads up Southern European markets for Rivercrown