MARKETBEAT PORTUGAL AUTUMN A Cushman & Wakefield Research Publication. GARE DO ORIENTE - LisboN

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1 MARKETBEAT PORTUGAL A Cushman & Wakefield Research Publication AUTUMN 2012 GARE DO ORIENTE - LisboN

2 AUTUMN 2012 A Cushman & Wakefield Research Publication index Executive summary EconomY Retail Background Market Indicators Outlook OFFICES Background Market Indicators Outlook industrial Background Market Indicators Outlook HotELS Background Market Indicators Outlook residential Background Market Indicators Outlook investment Background Market Indicators Outlook LEGISLATION contacts

3 MARKETBEAT A Cushman & Wakefield Research Publication EXECUTIVE SUMMARY The Portuguese real estate market continued to be marked by the adverse national economic situation during the first half of The negative impact of the economic difficulties which the country is suffering has a transverse effect on real estate investment, development activity and the occupational markets. The decline of existing household income, decrease in private expenditure, increase in unemployment tax and the lack of financing in the economy has had devastating effects on the real estate activity. The additional austerity measures which were recently announced by the Government have aggravated the future previsions, and in turn forced a slippage in the economy s recovery. Additionally this has caused more social controversy and possible political instability which conveys a negative image of the country. Although these austerity measures are enormously prejudicial to the internal market, they have given Portugal credibility and it is considered that the necessary measures are being taken in order to correct the past trajectory. The Bank of Portugal s latest forecasts point to a strong contraction of economic activity, in 2012, followed by slight recovery in 2013, although in the meanwhile these forecasts were revised downwards by the government. The forecast evolution for the domestic economy will be marked by the macroeconomic imbalances adjustment process, under the Economic and Financial Assistance Programme agreed between the Portuguese government and Troika. The retail sector continued to be a victim of the effects of its own maturity, in the first half of 2012, in addition to the continuation of a sharp drop in consumers purchasing power. Retail turnover has also been significantly impacted by lower levels of disposable household income, and the gap between food and non-food sectors has widened. The combined effect of lower takings at the till, higher vacancy rates and consequent rent adjustments have also led to adjustments to property values which, in some cases, are drastically down. Office space in Lisbon continued to witness a fall in demand, a movement that has been occurring in this sector since Property demand continues to be mainly fuelled by cost reduction strategies, occasionally accompanied by reductions in the size of area to be occupied deriving from fewer requirements in terms of human resources. Unemployment continues to have a negative impact on demand and may well stimulate new highs for market vacancy rates, and therefore owners might continue to show flexibility if they wish to attract new tenants and keep the old ones. The country s economic environment, particularly the sharp downturn in private consumption, has also had a major impact on the industrial and logistics market in Portugal. The high level of dependence of logistics activity has caused the industrial property market to stagnate, which hasn t yet been offset by the expected boost from higher exports. A wait and see approach adopted by occupants and investors alike is, however, a nationwide constant. Following improvements in 2011, the first half 2012 in hotels witnessed a downturn in the main domestic tourism indicators. Contributory factors were the adverse economic circumstances in several of the country s main European feeder markets, together with stiffer competition. Many hotels are facing liquidity problems, which will continue to bring pressure over the sector to keep average amounts charged per stay competitive. Financial institutions lending restrictions, particularly for the property sector, have a very considerable impact on the residential market. Households lack of confidence, increases in the fiscal burden and the economic context in general, are also limiting factors on the decision to purchase a home. However, lower house sales do not have a direct effect on the reduction of the population s housing needs, which appears to have contributed towards the appearance of a more effective, rational home rentals market in Portugal. Portuguese real estate investment market had a worsening performance in the first half The market is currently being affected by rating downgrades on Spain s sovereign debt, as well as investors lack of confidence in the domestic economy, strong restrictions or even an absence of funding, and the poor performance of occupational markets. Fulfilling the dispositions of the Memorandum of Understanding between the Portuguese State and Troika, the urban lease regulations were once again recently reformed. Changes were made to the NRAU (New Urban Lease Regime) which was introduced in 2006, the legal regime on works on leased buildings and the legal regime on urban rehabilitation. According to Uría Menéndez Proença de Carvalho law firm, the global balance of this reform is positive and reflects the possible balance between the interests of owners and tenants, and it is hoped that will give a significant boost to the Portuguese urban lease market. 3

4 AUTUMN 2012 A Cushman & Wakefield Research Publication Economy The Bank of Portugal s latest forecasts point to a strong contraction of economic activity in 2012, followed by slight recovery in According to their Summer Economic Bulletin, published in July, the forecast evolution for the domestic economy will be marked by the continued adjustment of the country s macroeconomic imbalances, under the Economic and Financial Assistance Programme ( bailout ) agreed between the Portuguese government and Troika comprising the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF). It will also be influenced by the slowdown of world economic growth which, in the euro zone, is likely to be marginally negative. The first few months of 2012 were also marked by heightened uncertainty over the EU s capacity to actually resolve the sovereign debt crisis. GDP (Annual Rate of Change) /2013* COUNTRY * 2013* Germany 3.0% 0.7% 1.7% Greece -6.9% -4.7% 0.0% Spain 0.7% -1.8% -0.3% Portugal -1.6% -3.3% 0.3% Euro Area 1.5% -0.3% 1.0% United Kingdom 0.7% 0.5% 1.7% Source: European Commission - Spring European Economic Forecast (May 12) * Forecast Domestic demand will continue to be negatively affected by the need for fiscal adjustment and will not be sufficiently offset by the positive contribution of exports which are likely to be lower than in However, while Bank of Portugal forecasts indicate a negative GDP growth rate in 2012, with a drop of 3%, this is a less significant fall than indicated in their previous forecasts is expected to continue to be a year of economic stagnation, with a gradual recovery of domestic demand and export growth. Economic Indicators (Annual Rate of Change) /2013* % Annual Growth Downward revision of public consumption to -3.8% in 2012 and -1.6% in High inflation in 2012, owing to changes in VAT and IRS (personal income tax) rates and hike in oil prices. These are likely to dissipate in Unemployment to remain very high at 15.4% in 2012 and 16.2% in Household Savings Rates / % 10% 8% 6% 4% 20% 15% 10% 5% 0% -5% -10% Source: INE; Bank of Portugal - Summer Bulletin (July 12); OECD (May 12) * Forecast (1) Annual Growth Rate (2) Current Rate Q Q * 2012* 2013* Private Consumption (1) Public Consumption (1) GDP (1) Unemployment Rate (2) Inflation (2) Source: INE - Quarterly Accounts by Institutional Sector Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Private consumption has been the economic indicator most affected, with negative growth of 5.6% in 2012, projected to improve but still fall in 2013, by 1.3%. This is mainly explained by the negative evolution of real disposable income, in an environment of higher unemployment. Greater restrictions on borrowing and negative expectations regarding the evolution of incomes will also have a negative impact on household consumption decisions, resulting in across-the-board containment. Owing to budget restrictions, households will continue to adjust their balance sheets to pay off debt, in their expectation of a reduction of disposable income and a deteriorating labour market. Accordingly, based on a wait and see approach, the trend towards higher savings rates in 2012 and 2013, which started in the second half of 2011, is likely to continue. 4

5 MARKETBEAT A Cushman & Wakefield Research Publication RETAIL Retail Schemes - Total Stock /2015* Background The retail sector continued to be a victim of the effects of its own maturity, in the first half of 2012, in addition to the continuation of a sharp drop in consumers purchasing power. Retail turnover has also been significantly impacted by the economic crisis and the associated lower levels of disposable household income. Sales in the different segments have dropped to a seven-year low and the gap between food and non-food sectors has widened. GLA Growth (thousands of sq.m) Until * 2013* 2014* 2015* GLA Growth (sq.m) Total GLA (sq.m) GLA Growth (millions of sq.m) Evolution of Retail Trade Index / Source: Cushman & Wakefield * Forecast Overall supply 3.66 million sq.m of GLA. First half 2012 a single retail scheme opened. 110 Pipeline to 2015 weak growth continues Multiusos Oriente in Loures (Greater Lisbon) was the only retail scheme to open in Portugal in the first half of This retail park, whose main tenants are Lidl and Seaside, was developed by Obriverca and has an overall 6,400 sq.m of GLA. 80 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Global index excluding fuel Food retail Non-food retail Current and Expected GLA by Region (sq.m) /2015 Source: INE Market indicators Evolution in the supply of retail space in Portugal, continues to reflect the downwards adjustment that started in is likely to witness the lowest overall growth since the 1990s, practically flatlining at around 10,000 sq.m of GLA. Thousands of sq.m. 1, North (excludes Greater Porto Centre Greater Lisbon Setúbal South Islands Greater Porto) Península Current GLA Expected GLA Source: Cushman & Wakefield The pipeline reflects geographical decentralization in Lisbon and Porto. Greater Porto, Center and Islands have no pipeline until

6 AUTUMN 2012 A Cushman & Wakefield Research Publication Around 221,000 sq.m of GLA in the pipeline is expected to come onto the market by 2015, with a total of 8 projects 1. There is still, however, a great deal of uncertainty over whether all of these planned projects will go ahead and only 9% are presently under construction. Most notably, this includes Évora Shopping, with an overall GLA of 16,100 sq.m, scheduled to open in autumn The marketing of this shopping centre, which has already secured the presence of fashion and food anchors, has enjoyed a positive level of performance and shows that a project s feasibility, when of the right size and in a good location, is guaranteed. There are still, however, opportunities for the future development of new retail schemes, albeit increasingly fewer in number. Shopping centres account for the majority of integrated retail supply, with 2.98 million sq.m of GLA, accounting for 81% of the total. Prime centres have remained attractive on account of their strategic merits, aided by occasional refurbishing operations, as well as the appearance of new shops. This is exemplified by the Amoreiras Shopping Centre, whose food court and common areas were recently refurbished and where Trussardi Jeans and Proshop clothing brands, Elements jewellery and Apple products supplier GMS Store all opened. Retail parks account for 12% of retail schemes. The format has had to struggle with the highest level of retraction in terms of demand from retailers. This is explained by the fact that fewer operators are setting up shops in this retail segment, in addition to competition from standalone retailers. The supply of factory outlet centres remains at 232,000 sq.m of GLA and also continues to benefit from the fact that the economic situation is leading consumers to seek out the type of supply found in such retail schemes, which usually provide higher discounts. Reflecting the greater appeal of this retail format, reference should be made to the shop openings of Asics/Onitsuka Tiger sports brand, Geox shoe store and Chicco child brand in the Freeport Outlet Centre in Alcochete. High street shopping continues to flourish, with growing consumer footfall, particularly from tourists. Demand for this type of more traditional space continues to be fuelled, either by operators usually found in shopping centres who have diversified into this format like Vitaminas & Companhia; or new entrants or re-entrants in Portugal, such as Amorino, Roche Bobois and Cartier. Current GLA by Format FACTORY OUTLETS 6% Source: Cushman & Wakefield RETAIL PARKS 12% Current GLA by Format SHOPPING CENTRE 82% FORMAT GLA(sq.m) % GLA TOTAL Shopping Centres 2,984, % Factory Outlets 232, % Retail Parks 449, % Portugal 3,665, % Source: Cushman & Wakefield High street retail, having first been given a new lease of life in Lisbon s Avenida da Liberdade and Chiado areas has also expanded to Porto. The redevelopment of Passeio dos Clérigos in Porto is a recent example of how the segment has benefited from the creation of high quality urban regeneration projects. In light of this greater appeal and to ensure a high quality response to retailers and consumers demands, the need for coherent global management with common goals is a matter of increasingly pressing concern for high street shopping areas. Market rents for prime assets remained stable over the first half but relating only to the limited number of property representing the best each segment has to offer. Second-tier products, owing to greater competition and lower takings, continue to be the most affected with a greater need to give fresh thought to their 1 New projects or refurbishment and/or expansion projects. 6

7 MARKETBEAT A Cushman & Wakefield Research Publication operations. Rents for shopping centres in second-tier cities are down 15% over the historical peak of 2006 and currently stand at around 30/sq.m/month. The average rent for retail parks is down 25% from the highest ever peak recorded in 2008 to 6/sq.m/month. PRIME RETAIL RENTS FORMAT /sq.m/month Shopping Centres 75 Retail Parks 9 Indeed, reducing rents as a solution to sustaining property will not be sufficient for all projects. Owners must therefore re-examine their operations in order to achieve feasible projects. Opportunities in the sector will be based on the need to remodel and reposition several retail projects. Such changes must provide for a paradigm shift in which consumers have less money in their pockets and are therefore more selective and demanding. Competition is also greater and stiffer than in the past. High Street - Lisbon (Chiado) 80 High Street - Porto (Rua de Santa Catarina) 43 Source: Cushman & Wakefield Outlook Based on the government s recent announcement of additional austerity measures, the outlook for retail activity includes the possibility of a worsening of the current environment. Retailers takings will continue to be affected by the drop in consumers disposable income levels, already affected by the elimination of civil servants and pensioners holiday and year-end Christmas bonuses, as well as the recent supplementary measures presented by the government for 2013 that will affect all workers. Notwithstanding the fact that a part of the adjustment to private consumption was felt over the course of the first half year, explained by advance announcements of the first measures adopted for civil servants, the disclosure of information on fresh cuts may induce additional adjustments to the volume of the consumption of private households. MULTIUSOS ORIENTE Source: Cushman & Wakefield The combined effect of lower takings at the till, higher vacancy rates and consequent rent adjustments have also led to adjustments to property values which, in some cases, are drastically down. Prime property, however, which continues to be most in demand, remains attractive, as opposed to property with less appealing characteristics in second-tier zones which has been forced to readjust. Extreme cases have required the need for alternative uses to re-establish such property s commercial feasibility. 7

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9 MARKETBEAT A Cushman & Wakefield Research Publication Offices Background The first six months witnessed a continued fall in demand for office space in Lisbon. This movement has been occurring in this sector since 2008, in line with an across-the-board crisis in the property market and the economy. The services confidence indicator has practically stagnated since the start of the year, at historically low levels. Corporate confidence levels regarding job creation potential and higher demand, albeit slightly more optimistic than at the start of 2012, are also negative. Market Indicators Between January and June 2012, 36,000 sq.m of office space was transacted, up 17% year-on-year. This figure, however, is indicative of a very sluggish market and was less than half the average level of activity seen in the same period between the years 2003 and Take-Up /2012 Thousands of sq.m Confidence Indicator in the Services Sector and Outlook for Employment and Demand* / Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Confidence Indicator Employment Demand * Evolution for the next 3 months; Seasonally Adjusted - 3 months moving average Source: INE Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 As a result, property demand continues to be mainly fuelled by cost reduction strategies, occasionally accompanied by reductions in the size of area to be occupied deriving from fewer requirements in terms of human resources. Call centres, financial services and technology are the most active sectors in terms of the occupancy of new office space. Demand deriving from an expansion of occupied areas or the appearance of new companies are less frequent, except for interest from start-ups which normally take-up very small areas. Source: Cushman & Wakefield / LPI 1st Half 2nd Half 2008: historical take-up levels peak at more than 230,000 sq.m : accumulated drop of more than 60%. 2012: volumes likely to be similar to The Western Corridor (Zone 6), albeit down 5% over the preceding year, was once again the zone with the highest volume of transacted area. It also accounted for the largest number of transactions at more than 40, comprising an average transacted area of 279 sq.m. Similarly, most of the top performing projects during the half year, with a total transacted area of 8,600 sq.m are to be found in this area, such as Parque Suécia, Sintra Business Park, Quinta da Fonte and Lagoas Park. Parque das Nações (Zone 5) with growth of 48% over first half 2011, once again came second in terms of being the zone with the highest level of activity. This zone, with only 10 business deals, achieved one of the highest levels in average transacted area at 613 sq.m and also set the scene for the half year s biggest deal with the full occupancy of 3,200 sq.m of office space in Cais Office by the Teleperformance company. The Prime CBD (Zone 1) while down 13% year-on-year, represented more than 15% of total first half demand in the form of 15 transactions with an average area of 371 sq.m, including venture capital company ECS s occupancy of 1,500 sq.m in the 9

10 AUTUMN 2012 A Cushman & Wakefield Research Publication Castilho 20 building. Following an historical minimum, in 2011, Zone 7 turned in the best performance of the first six months of the year, since 2008, with transactions totalling 4,900 sq.m. This zone, with a total number of 7 transactions, achieved the highest average occupancy area of 695 sq.m and was responsible for the second largest business deal of the half year when Banco Espírito Santo s services took 3,200 sq.m in the Gago Coutinho 26 building, owned by the group. Zone 4 recorded the largest drop, with only one occupancy deal registered in the first semester. Zones 2 and 3 recorded similar occupancy volumes, albeit significantly down over the preceding year in Zone 2, as opposed to Zone 3 which posted a significant increase. Top 10 Best Performing Buildings Cais Office Gago Coutinho, 26 Lagoas Park Quinta da Fonte Sintra Business Park Suécia Castilho, 20 Colombo Towers Europa Sacavém Parque Oriente 0 1,000 2,000 3,000 4,000 Transacted Area (sq.m) Take-Up by Zone /2012 Transacted Area (sq.m) 16,000 Source: Cushman & Wakefield / LPI 100 deals completed. Average transacted area: 360 sq.m. 81% of deals with areas between 101 and 500 sq.m. Two deals with more than 2,000 sq.m. 8, Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone Source: Cushman & Wakefield / LPI The 12.5% vacancy rate was the highest ever recorded. The Western Corridor recorded the highest vacancy rates, both in percentage (22.3%) as in volume terms. The more than 200,000 sq.m of available area in this zone alone comprises more than 35% of Greater Lisbon s total vacant area. There were also higher vacancy rates in almost all other zones except for Zone 7, owing to a methodological change in terms of zone definition, with buildings in Avenida Almirante Reis being reclassified from Zone 4 to Zone 7. Only Zone 2 recorded a new building development in first half 2012 in the form of Tecniarte s development of 50 Office, with an area of 2,800 sq.m. The pipeline continues to adjust to the current situation, with a forecast of just over 125,000 sq.m until Speculative construction has practically come to a standstill, except for building refurbishment operations in CBD zones. This exception, however, has filled a gap in terms of quality supply in these zones, providing fresh evidence of the vitality of urban regeneration projects. Many such buildings, comprising 59% of the total pipeline, are, however, for own use or have already secured tenants for a part or even all of the buildings. CAIS OFFICE Source: Cushman & Wakefield 10

11 MARKETBEAT A Cushman & Wakefield Research Publication The fact that no projects have been scheduled for the Western Corridor and Parque das Nações zones, which have the highest vacancy rates, should help to achieve a natural correction of the imbalance between supply and demand. In market terms, the prime rent fell from its 2007 peak of around 21/sq.m/month to 18.5/sq.m/month in June 2012, down by around 12% between the two periods. The Western Corridor, which posted an 18% decrease in prime rents from 14/sq.m/month in 2007 to 11.5/sq.m/month in 2012, was the zone most affected by this drop. Vacancy Rate / % 20% 16% 12% 8% To protect property returns, owners continue to prefer to maintain nominal rent values but are more willing to give ground in terms of contractual incentives, such as longer void periods, staged rent payments or contributions to fit-out costs. 4% 0% Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone Outlook The year end outlook for 2012 suggests that the current market situation is unlikely to change and that activity levels will be similar to those registered in This outlook is, however, contingent upon the successful completion of a small number of major deals which may or not take place before the end of the year. Set against a market backdrop involving increasingly protracted negotiations, there is a strong possibility that such transactions will not proceed in Unemployment will continue to have a negative impact on demand and may well stimulate new highs for market vacancy rates. Owners must, therefore continue to show flexibility if they wish to attract new tenants and keep the old ones. Source: Cushman & Wakefield Pipeline /2014 sq.m 80,000 60,000 40,000 20,000 0 Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 New construction Refurbishment * Source: Cushman & Wakefield * Includes complete refurbishment with facade maintenance RENTs ZONE Average ( /sq.m/month) Prime ( /sq.m/month) Prime Central Business District Parque das Nações Out of Town Source: Cushman & Wakefield 11

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13 MARKETBEAT A Cushman & Wakefield Research Publication INDUSTRIAL Background The country s economic environment, particularly the sharp downturn in private consumption, has had a major impact on the industrial and logistics market in Portugal. Indeed, the high level of dependence of logistics activity, negatively affected by the drop in retail activity, has caused the industrial property market to stagnate. This has still to be offset by the hope for boost of higher exports. The sector s sluggish performance in the first half of the year was more visible in Greater Lisbon. Greater Porto however suffered from a shortage of quality spaces and recorded a certain amount of active demand from logistics operators interested in decentralising their locations in order to reduce transport costs. A wait and see approach adopted by occupants and investors alike is, however, a nationwide constant. Market indicators In general, the low demand that does exist for logistics space has been limited to small units of less than 1,000 sq.m, essentially fuelled by tenants strategies of reducing their occupancy costs by taking advantage of current market conditions. Owners have in fact adopted a visibly more pragmatic approach to new contract negotiations, particularly as regards length, which may be shorter, with fewer restrictions on early terminations and mainly at much lower contractually agreed rents or with more incentives such as rent-free periods. Rents both in Greater Lisbon and Greater Porto have remained stable in comparison to the end of last year, except for Zone 1 (Alverca-Azambuja), whose maximum amount was down 0.5, to a current rent of 4/sq.m/month. This development reflects a market with a small number of transactions. There has also been a universal increase in the supply of space in all zones, albeit with availability continuing to be less abundant in Loures (Zone 3) and in the city of Lisbon (Zone 6). Diverse closures of various small manufacturing plants/workshops since the onset of the crisis have been counterbalanced by greater demand for properties vacated in the meantime. This demand is, however, highly selective and focuses on high quality buildings in good locations from opportunistic investors who are extremely aggressive in terms of price. As regards the sale of land, high borrowing costs, when such borrowing facilities are even available, have helped to significantly reduce this area of activity, with sales of land in Portugal being few and far between. Active purchasers belong to a restricted group whose business is structured on their own equity capital, exploiting the market s current situation, concentrating only on prime locations and driving some very hard bargains. Development activity in the sector has come to a standstill and is limited to isolated projects with a guarantee of occupancy. Speculative construction in the industrial and logistics market has been stagnated for a very long time. This situation is somewhat incongruent as the absence of speculative development over the last few years and the reduction in the level of construction of new, modern space have led to a shortage of property especially equipped for certain activities such as the distribution of Main Industrial Areas - Lisbon Region ZONE AXIS ZONES Rent Ranges Practiced ( /sq.m/month) 1 Alverca - Azambuja Póvoa de Santa Iria, Alverca, Vila Franca de Xira, Azambuja and Carregado 3,75-4,50 High Low 2 Almada - Setúbal Almada, Seixal, Quinta do Anjo, Palmela and Setúbal 2,50-3,00 High Low 3 Loures Loures, Odivelas, São Julião do Tojal and MARL 3,75-4,25 Low Low 4 Montijo - Alcochete Montijo and Alcochete 3,25-4,00 Moderate Low 5 Sintra - Cascais Sintra, Cascais, Oeiras and Amadora 4,00-4,75 High Low 6 Lisbon - City Between St. Apolónia and Parque das Nações n.d. Low Low Greater Porto 3,50-4,50 Supply DEMAND Source: Cushman & Wakefield 13

14 AUTUMN 2012 A Cushman & Wakefield Research Publication pharmaceutical and food products which require specially refrigerated facilities. Difficulties in securing finance, allied with prospects of relatively unappetising returns from such projects owing to lower rents, have caused a shortage of new customised spaces for such activities. On the other hand, the Portugal Logistics programme, as a public private partnership, designed to develop the Portuguese logistics system and which was expected to provide the sector with a boost, has practically ceased, except for the Port of Leixões platform, in the Greater Porto area, whose development was recently announced by the port authority. In spite of the shortage of quality space in the region and continued expansion of activity in the Port of Leixões, allied with expectations for the growth of maritime transport, the public tender for the platform s construction was cancelled last year owing to a lack of funding available to the successful consortium. The Douro and Leixões Ports Authority, responsible for managing the Port of Leixões, recently announced that it would be responsible for the construction of this platform. The growth prospects for maritime transport in Europe also appear to be an increasing certainty. This trend could comprise an opportunity for Portugal owing to the competitive advantage for its ports, in line with other European competitors, coming from the widening of the Panama Canal. The canal s expansion works, scheduled for completion in 2014, will permit the passage of deep keeled vessels and make the Portuguese coast into a natural gateway for products in Europe. The situation, however, may not be sufficient for greater goods traffic through Portuguese ports if the government fails to keep its promise to align the railway network to the European gauge by 2014, in addition to more investment in the modernisation of domestic ports. In this area, the recently announced investment in the Port of Leixões and current improvements at the Port of Sines may contribute towards the domestic maritime transport sector s growth potential. Trade Balance /2012* Investment activity, as in all property market sectors, has stagnated, with higher levels of activity in the industrial sector in 2010 and 2011 coming to an end in Investment in the sector this year was in fact exceptionally low at only 2% of the first half year investment total. Millions of 80,000 60,000 Outlook The year end outlook for the industrial sector is far from promising with occupancy and investment levels expected to remain stagnant. There is also a certain risk of a part or even total vacating of spaces occupied by logistics operators who have reported low levels of use of the buildings they currently occupy, due to the downturn of activity. The situation in the sector is likely to remain difficult up to the end of the year and possibly into first half 2013, fuelling further drops in demand and higher vacancy rates. 40,000 20,000 0 Source: INE * 1st Semester * Exports Imports On a lighter note, reference should be made to the improvement in the current trade balance since This has been fuelled by higher export growth which may have a positive effect on future occupancy rates in the logistics market. 14

15 MARKETBEAT A Cushman & Wakefield Research Publication HotELS Background Following improvements in 2011, the first half 2012 witnessed a downturn in the main domestic tourism indicators. Contributory factors were the adverse economic circumstances in several of the country s main European feeder markets, together with stiffer competition, either based on price cutting or growth of supply in other destinations. Many hotels are in fact facing liquidity problems, following high levels of investment in new projects over the last few years. In this type of situation, group buying companies have been coming to the fore on account of the significant discounts they provide, owing to the liquidity requirements of hotel owners who obtain free advertising enabling them to achieve short-term occupancies in the low season. The hotel sector also depends on nationwide tourism promotion as a whole. On the minus side many municipalities with a high level of tourism-associated real estate investments are currently facing financial difficulties. Portugal has, however, hosted a diverse collection of events such as the Volvo Ocean Race and The Tall Ships Races, which in passing through Lisbon as a port of call have increased Portugal s appeal as a destination for tourism. This has been certified by the European Cruise Council ranking, which represents the main group of European cruise liner companies according to which Lisbon is already the sixth European destination in number of visitors with around 1.1 million passengers in Reference should also be made to the difficulty of several companies which have scheduled to make investments in the tourism area, but have suffered due to difficulties with bank funding. This is exemplified by the SAIP group, responsible for the Roncão d El Rei tourism project in the Alqueva zone, with a total investment in excess of 22 million which has recently filed for bankruptcy. Market indicators The first half 2012 witnessed an across-the-board year-on-year drop in all tourism sector indicators over 2011, except for the number of air passengers. There was a 2.4% drop in the number of guests while bednights were down 1%. The 3.8% decrease in hotel revenues brought bednight revenues down to their lowest level of the last 5 years at around 45.9 million, resulting in negative growth of 2.8%. Evolution of Domestic Tourism Indicators - First Semester 2008/2012 Indicators % Change 2011/12 Passenger movement in airports (million) % Guests (million) % Bednights (million) % Hotel Revenues ( million) % Revenues per bednight ( million) % Source: INE, ANA and ANAM; Cushman & Wakefield analysis 33% of a total of 13.8 million air passengers used low cost flights. Growing trend in the proportion of foreign guests: 55%. A more resilient bednights indicator owing to the effect of the drop in the average amount charged per stay. As stated, air traffic was the only indicator to evolve positively, albeit by no more than 0.4% over the first six months of Results on a regional level, however, were unequal, with Lisbon achieving the best overall result of 3.1% and low cost result of 12.2% while Madeira recorded the highest downturns of 8.5% and 11% respectively. Porto continues to be the region with the second highest volume of passengers after Lisbon, although this has flatlined since The Algarve region, given the 1.6% drop in low cost passengers who account for more than 70% of the total, witnessed a slight decrease of 0.1%. 15

16 AUTUMN 2012 A Cushman & Wakefield Research Publication Passenger Movement in Airports (million) Region TOTAL % Change LOW COST % change 2011/ /12 Algarve % % Lisbon % % Porto % % Madeira % % Source: INE, ANA and ANAM; Cushman & Wakefield analysis Passenger movement in airports (million) - First Semester 2007/2012 Lisbon in 6th place in the ranking Certified by the European Cruise Council ranking, which represents the main group of European cruise liner companies, according to which Lisbon is already the sixth European destination in number of visitors with around 1.1 million passengers in Millions Source: ANA A total of 16.8 million bednights in hotels was recorded in first half Lisbon was the only region to post a positive 3.9% year-on-year evolution to around 4.2 million bednights. The Algarve remains the most popular region with 5.5 million bednights, slightly down, year-on-year, by 0.2%. The Madeira region posted a drop of 4.6% in the same indicator, following the highest growth level achieved in 2011, possibly on account of lower demand from its main feeder markets. The slight 0.4% downturn in the northern zone was accompanied by sharper drops in other locations with overall lower demand. Source: Cushman & Wakefield 16

17 MARKETBEAT A Cushman & Wakefield Research Publication Bednights in Hotels (annual rate of change) - First Semester 2010/ % 10% 5% 0% -5% -10% -15% North Center Lisbon Alentejo Algarve Azores Madeira Total Source: INE; Cushman & Wakefield analysis Better first half performance between 2009 and 2010, notwithstanding a 1% drop over Accumulated change of 18% since Lowest level of domestic demand for the last 5 years. Domestic demand, down 10.3% over the same period of the preceding year, was responsible for 5.1 million bednights in first half Greater restrictions on household budgets have led to a cut in expenditure on leisure activities, including tourism. Foreign demand, responsible for around 70% of total demand, was up 3.7% The United Kingdom, although down 1% over first half 2011, retained the lead with 23% of total bednights. Owing to the economic environment in their own countries and demonstrating the opposite effects generated by them, Spain posted the largest retraction of 10.2% and Brazil the largest growth of 23.7%. The latter country is already the sixth largest feeder country in terms of demand for bednights in Portugal. Outlook The first half trend is likely to continue through the remaining months of The drop in the level of hotel sector performance will continue to bring pressure to bear on the sector to keep average amounts charged per stay competitive. Domestic demand will continue to be affected by the country s economic situation and growth of external demand, owing to the general uncertainty in Europe, is likely to be slow. On the other hand, the growing hostels trend in Portugal, with international prizes for the quality of their diverse units, will continue to appeal to tourists as an alternative. This market niche has also been identified by urban regeneration investors who increasingly consider that Lisbon and Porto enjoy good value creation potential. In pipeline terms, funding difficulties will likely remain as will developers greater and continued perception of risk. Bednights by non-resident in Hotels BRAZIL 5% ITALY IRELAND 3% 3% FRANCE 8% OTHERS 26% NETHERLANDS 8% SPAIN 9% UNITED KINGDOM 23% GERMANY 15% Source: INE; Cushman & Wakefield analysis 17

18 AUTUMN 2012 A Cushman & Wakefield Research Publication RESIDENTIAL Background The first half saw no changes to the difficult background seen in the residential market in 2011and the situation is likely to remain unchanged over the next few years. Financial institutions lending restrictions, particularly for the property sector, have a very considerable impact on the market for the sale of houses in that it is highly unusual for funding not to be required. There are also several other limiting factors on the decision to purchase a home. These include households lack of confidence, borne out by successive falls in confidence indicators and higher unemployment, increases in the fiscal burden and the economic context in general. According to data from the consumer survey carried out by the National Statistical Office (INE) there continued to be a downward trend, as in the preceding year, in Portuguese citizens intentions to buy or build homes, falling to an historical low in October 2011, with no changes expected during the course of Market indicators Last year s sharp slowdown in house sales was also felt in the first half of the year and is clearly visible in data from Imométrica s Residential Information System (SIR) which indicate a major 20% fall in house sales in the Lisbon Metropolitan Area in the 1st quarter of 2012 in comparison to the preceding period. Offsetting this trend and also in accordance with SIR data, Porto recorded an increase in sales of second hand homes. As opposed to sales, there are signs of an increase in rentals in the residential sector, although this has still to be confirmed by reliable sources as there is no systemised collection of such information. The announced resurgence of the residential rental market in Portugal, fuelled by ever increasing market supply, recent changes in the rent act and increasingly unfavourable conditions for home purchases may be more visible in Confidence Indicator of Consumers - Outlook Housing Purchase or Construction* / Jan-98 Jun-98 Nov-98 Apr-99 Sep-99 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Housing purchase or construction Source: INE * Evolution for the next 12 months; Effective values - moving average of 2 quarter observations House Sales (number) /Q ,500 2,000 1,500 1, Q MA Lisbon - New MA Lisbon - Used MA Porto - New MA Porto - Used Source: SIR; Cushman & Wakefield analysis The increase in the supply of rental property has been noted since the middle of last year, most possibly on account of the increase in household default rates on bank loans. This situation has led to a considerable increase in commercial banks residential 18

19 MARKETBEAT A Cushman & Wakefield Research Publication portfolios which, due to the lack of alternatives have opted to rent to achieve returns from such properties. This data can be confirmed by the average amount of Portuguese households outstanding loan capital which have been declining since mid As it is highly improbable that this effect is the result of the massive repayment of loans by households, the increase is most possibly explained by banking entities repossessions and latter payment of outstanding amounts. Implicit Interest Rate in Housing Mortage /2012 6% 5% 4% 3% GLOBAL AVERAGE OF MORTAGE HOUSING VALUATION IN PORTUGAL /2012 2% 63,000 1% Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jun-12 62,800 62,600 62,400 62,200 62,000 Source: INE Positive evolution of this indicator since January March 2011 maximum: 62,900. Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Downwards evolution up to May 2012: 62,280. The greater security afforded to owners under the new rent act is also likely to have a positive effect on the supply of homes for this purpose. The reduction of risk and increase in supply are expected to have a negative impact on prices, increasing the appeal of renting as opposed to purchasing, where conditions have deteriorated over the last few years on account of higher bank spreads. Source: INE Interest rates on total contracts continued their fall, beginning 2009, with the adjustment to Euribor. Higher interest rates on new contracts from the end of 2010, owing to higher bank spreads. In June 2012 the highest rate of around 4% was charged on contracts entered into within the last 6 months. This represents a spread of 175 basis points over the total rate of 2.25%. Average Unit Value ( /sq.m) /Q ,500 2,000 1,500 1, Total Last 3 months Last 6 months Last 12 months Q MA Lisbon - New MA Lisbon - Used MA Porto - New MA Porto - Used Source: SIR; Cushman & Wakefield analysis 19

20 AUTUMN 2012 A Cushman & Wakefield Research Publication Greater restrictions on bank loans have a direct effect on house prices as most operations in this market involve the need for loans. Notwithstanding, according to SIR data, the market remains relatively inflexible in terms of price adjustments. This trend could increasingly contribute to the option of renting as opposed to buying a home. UNITARY VALUES OF MORTAGE HOUSING VALUATION IN PORTUGAL ( /sq.m) /2012 1,500 1,400 1,300 1,200 1,100 1, Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Global Average - MA Lisbon Sep-10 Jan-11 May-11 Sep-11 Global Average - MA Porto Jan-12 May-12 Outlook The urban residential market in Portugal in 2012, failed to show that it had adapted to the new domestic economic circumstances. Although there are no official statistics to enable an overall market analysis to be made, available data clearly indicate an increase in the cost of purchasing a home which has still not been truly reflected in the amount charged. This indicates a considerable fall in the volume of demand for houses, resulting in an increase in available supply. On a more positive note, lower house sales do not have a direct effect on the reduction of the population s housing needs. This appears to have contributed towards the appearance of a more effective, rational home rentals market in Portugal. Another contributory factor was the recently published revision of the rent act which has already made important favourable changes to the market in general, notably as regards old rent contracts which have remained practically unchanged for decades. The recent launch of the Rental Solution fund managed by the Norfin real estate investment management fund, designed to give form to the social rental market under the Social Emergency Programme created by the government, is an example of what could be a solution for improving returns from the increasingly higher volume of housing in banks balance sheets. Source: INE INE data on the average amounts of banking valuations as an alternative source for analysing amounts being charged in the market, however, reflect a sustained adjustment since This has been felt more keenly in Lisbon as opposed to the Porto Metropolitan Area. Average house prices in the Lisbon Metropolitan Area, in June 2012 were 1,249/sq.m, down 13% over September The adjustment of around 11% from 1,089/sq.m in September 2008 to 967/sq.m in June 2012 was less marked in the Porto Metropolitan Area. TERRAÇOS DE BRAGANÇA Source: Cushman & Wakefield 20

21 MARKETBEAT A Cushman & Wakefield Research Publication INVESTMENT Background The worsening performance of the Portuguese real estate investment market in the first half 2012 continued to reflect the crisis in Portugal and he faint signs of light that had been detected at the end of the tunnel in terms of economic recovery were affected by June s rating downgrades on Spain s sovereign debt. Possibility of additional measures to achieve the goals attached to Portugal s bailout package. On a positive note, yields on Portuguese 10-year old treasury bonds, considered as the benchmark for non-risk investments and on which property yields are allegedly calculated, have been falling. 10 year treasury bonds / % Sovereign Debt Ratings * MOODY S STANDARD & POOR S FITCH 30% 25% Germany Aaa AAA AAA 20% Greece C CCC CCC 15% Spain Baa3 BBB+ BBB 10% Portugal Ba3 BB BB+ United Kingdom Aaa AAA AAA 5% 0% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Portugal Germany Spain Greece Source: Moody s, Fitch e S&P * August Source: European Central Bank As a result, the market is currently being affected by investors lack of confidence in the domestic economy as well as strong restrictions or even an absence of funding and of course the poor performance of occupational markets. In spite of the current situation, a certain level of demand for top quality retail and office space as well as for sale & leaseback operations has been identified from domestic and international investors. PUBLIC DEBT RATIO (% GDP) /2013* 180% 160% 140% 120% Real Estate Investment Funds - Liquidity Ratio / % 10% 100% 80% 8% 60% 6% 40% 20% * 2013* Germany Greece Spain Portugal Eurozone Source: European Commission - Spring European Economic Forecast (May 12) * Projection Possible drop in the volume of Iberian property investment owing to the rescue package agreed for the Spanish banks and eventual full bailout package for the country. 4% 2% 0% Jul-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Open funds Source: CMVM (Comissão do Mercado de Valores Mobiliários) Jun-09 Sep-09 Dec-09 Mar-10 Closed funds Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 21