C&W - Portugal Marketbeat Spring 2009 by João Pereira

MARKETBEAT Portuguese Real Estate Market a Cushman & Wakefield Research publication

spring 2009

MARKETBEAT portugal Map of Portugal

Table of Contents Introduction PORTUGAL............................................................................................................................................ 2 Table of Contents.................................................................................................................. 2 Executive Summary................................................................................................................. 3

Economy Economic Background................................................................................................... 4

Retail Retail market.................................................................................................................................. 5 Retail schemes............................................................................................................................... 5 Shopping Centres..................................................................................................................... 6 RETAIL PARKS....................................................................................................................................... 6 High Street trading.............................................................................................................. 7 new entrants.............................................................................................................................. 7 market values............................................................................................................................... 7

Offices Office market................................................................................................................................. 8 Lisbon Office Map...................................................................................................................... 8 Supply...................................................................................................................................................... 9 Demand................................................................................................................................................. 10 Market values............................................................................................................................... 11

Industrial INDUSTRIAL market.................................................................................................................... 12 Greater Lisbon Industrial Map................................................................................. 12

The Republic of Portugal covers a total geographical area of 92,090 km2 with its borders unchanged since the 13th century. Located in the Iberian Peninsula, it is the westernmost country in Europe, with the Atlantic Ocean to the west and to the south and with Spain to the north and to the east. In addition to the continental territory, the country includes the archipelagos of the Azores and Madeira. Portugal’s population comprises 10.6 million inhabitants, which amounts to a population density ratio of 115 inhabitants per km2. The Portuguese territory is based on three levels of administrative divisions. The largest one covers 18 districts (distritos) and the autonomous regions of Azores and Madeira. These are subdivided into 308 municipal districts (concelhos) and 4,260 parishes (freguesias). Lisbon is the capital of Portugal and the largest city in the country, with 500,000 inhabitants (2 million in the Greater Lisbon area). Porto is the second largest city with 222,000 inhabitants (1.3 million in the Greater Porto area). Portugal is a nation founded on democratic law. The sovereign bodies are the Presidency of the Republic, the Parliament, the Government and the Courts. The Presidency of the Republic is elected every 5 years and the current President is Aníbal Cavaco Silva. The election of the 230 members of Parliament occurs every 4 years, after which the Prime Minister (currently José Sócrates) is designated, who then appoints the Government. The country was one of the founding members of NATO (1949), is a member of the UN (1955) and joined the EU in 1986.

MAIN INDUSTRIAL LOCATIONS – GREATER LISBON AREA.......................... 12

Hotels hotels market.............................................................................................................................. 14 analysis of main indicators...................................................................................... 14 investment........................................................................................................................................ 15

Residential residential market................................................................................................................... 17 Urban residential..................................................................................................................... 17 RESIDENTIAL TOURISM................................................................................................................ 18

INVESTMENT INVESTMENT market.................................................................................................................. 19 INVESTMENT by sector.......................................................................................................... 19 INVESTMENT FUNDS..................................................................................................................... 19 future perspectives................................................................................................................. 20

Legislation LEGISLATION....................................................................................................................................... 21 commercial licensing......................................................................................................... 21 fiiah – real-estate investment funds and companies for the residential rental market..................................................................... 22

about us cushman & wakefield.......................................................................................................... 23 CONTACTS........................................................................................................................................... 23

Portugal | Spring 2009

EXECUTIVE SUMMARY The instability which has afflicted financial markets since 2007, together with the slowdown in worldwide economic activity, has led to global economic recession. The Winter Economic Bulletin, recently published by the Bank of Portugal, describes the harsh reality affecting the Portuguese economy, with falling GDP and private consumption.

Lisbon and South Bank

The real estate market was the first sector in the real economy to experience the effects of the crisis in Portugal and has been one of the most affected. All real estate sectors experienced across-the-board difficulties in the second half of 2008 and the situation is unlikely to change or may even get worse. The retail market shows an unquestionable disparity between supply and demand. Growth in supply shows no signs of slowing down, with high levels of activity and a significant number of retail schemes in the pipeline. There has been a sharp retraction in demand from retailers who, owing to the current economic environment and maturity of the sector, have adopted an increasingly cautious approach to expansion. In the office sector, as in all other domestic real estate sectors, the effects of the national economic and financial crisis were keenly felt and affected the decisions of occupiers and owners alike. However, the major business deals of the year, particularly the occupancy of Office Parque Expo by the Lisbon Courts, made a tremendous contribution to the total number of square metres transacted. 2008 was yet another record year for Lisbon office occupancy rates with around 236,000 sqm of office space having been transacted, up 16% from 2007. The crisis has also been felt in the industrial market, which, as a rule, is not particularly dynamic in Portugal. Notwithstanding announcements of lease agreements for major logistics warehouses and the assembly of new manufacturing plants in the first six months of the year, the second half of 2008 showed that occupiers and investors were clearly taking a cautious approach with few decisions having been made. Owing to the difficulties in the automobile and consumer goods sectors, 2009 is also likely to be an equally difficult year for the logistics sector. Although the tourism sector was slower than others to feel the effects, there is no doubt that the economic slowdown had a major effect on the Portuguese hotel sector in 2008 (and will continue to do so through 2009). Annual hotel demand was considerably down owing to the fact that both the UK and Spain, Portugal’s main source of tourists, were the European countries most affected by the crisis.

in second half of 2008, in a market trend reversal in which between 60% and 70% of transactions are usually closed in the second half of the year. Market prices will inevitably keep falling, with a new increase in yields being expected in the first half of the year. The second half of the year is expected to witness greater stability, particularly in prime assets, based on expectations of a modest return of bank financing.

25 DE abril bridge – lisbon

The Portuguese residential market was particularly affected by rising interest rates in the first nine months of the year, allied with increasingly restrictive lending policies. After a first stage involving an attitude of denial by developers and a “wait-and-see” attitude by purchasers, the last few months of the year have confirmed that the residential market is one of the first in Portugal to reflect the worldwide financial crisis. Like the residential market, the investment sector was one of the first to feel the effects of the current economic environment, in terms of day-to-day operations. The volume of assets traded during the year was slightly more than €500 million, 60% down over the preceding year. Only 36% of the total annual volume of transactions took place

MARKETBEAT ECONOMIC BACKGROUND The crisis currently devastating international financial markets since 2007, together with the slowdown in worldwide economic activity, has led to global economic recession.

parque das nações – LISBON

The Winter Economic Bulletin, recently published by the Bank of Portugal, describes the harsh reality affecting the Portuguese economy, with falling GDP and private consumption. January also saw the European Commission’s publication of its Interim Report for the 2009-2010 period, confirming the economic recession in Europe and painting an even gloomier picture for Portugal. Portugal’s poor economic performance in the last quarter led to a fresh downgrade of GDP growth to no more than 0.3%, in 2008, according to information supplied by the Bank of Portugal, which is forecasting negative growth of around 0.8% for 2009. The economy is expected to pick up in 2010, although recovery will be weak, with a residual growth rate of 0.3%.

GDP and private consumption are the two indicators with the largest discrepancy between the figures produced by the Bank of Portugal and European Commission, which is more pessimistic over Portugal’s economic performance. The European Commission has forecast a sharper fall of 1.6% in GDP, in 2009, and, unlike the Bank of Portugal, does not expect to see any economic recovery in Portugal by 2010. The European Commission has estimated negative growth of 0.2% for private consumption, in 2009, with a residual growth rate of 0.1% in 2010. The discrepancy is explained by the difference between the data upon which the forecasts were based. The Bank of Portugal has, nevertheless, indicated that even without this data difference, its forecasts would not be as negative as the European Commission’s, owing to its greater confidence over the impact of the anti-crisis measures adopted by various European Union governments. In terms of HCPI (Harmonised Consumer Price Index) changes, the fall in oil prices, will help to put a lid on inflation, in 2009, which is likely to be 1% and increase to 2%, in 2010. The latest OECD (Organisation for Economic Cooperation and Development) forecasts suggest significantly higher unemployment over the next two years. According to OECD forecasts, the 7.6% unemployment rate, in Portugal, in 2008, is expected to increase to 8.5% and 8.8% in 2009 and 2010, respectively.

Economic Indicators GDP Inflation Rate (Current)

Unemployment Rate (Current) Private Consumption

10 8 6 (%)

The Bank of Portugal has forecast a fall in the growth of private consumption, from 1.4% in 2008 to 0.4% in 2009. A marginal growth figure of 0.6% has been forecast for this indicator in 2010. Private consumption will be affected by several factors with contradictory effects, over the next two years. Although interest rate cuts on credit, fuel prices and inflation will have a positive effect on private consumption, greater restrictions on lending by banks, higher unemployment and increased savings rates, owing to greater economic uncertainty over the future will certainly have a negative impact on family expenditure.

4 2 0 -2

2001

2002

2003

2004

2005

2006

Source: Bank of Portugal; OCDE * Forecast

lisbon

2007 2008* 2009* 2010*

Portugal | retail | Spring 2009

RETAIL market There is an unquestionable disparity between supply and demand in the retail market. Growth in supply shows no signs of stopping, with high levels of activity and a significant number of retail projects in the pipeline. There has been a sharp retraction in demand from retailers who, owing to the current economic environment and maturity of the sector, have adopted an increasingly more cautious approach to expansion. Cutbacks in retailers’ expansion plans have had a direct impact on project leasing, with the market showing the first signs of imbalance between supply and demand. Seven retail projects, with a total GLA (gross lettable area) of around 170,000 sqm, opened in the last quarter of 2008, with occupancy rates of less than the 100% to which the market was accustomed to. Past euphoria has given way to an increasingly careful selection and negotiation process, with ever falling margins for projects with less potential. This scenario is likely to remain unchanged in 2009, involving the various market operators in a natural selection process, with additional difficulties in the sector stemming from Portugal’s deepening economic crisis and the maturity of the market. Shopping centre leasing will be made more difficult by cost cutting and the increasing bargaining power of retailers who fear the announced slowdown in consumption. Decree Law 21/2009 of 19th January comes into effect on 19th April 2009. The Decree Law sets out the new legislation on the licencing of new and existing retail projects and units. This Decree Law is a revision of Law 12/2004 of 30th March and its main objective is to remedy the difficulties encountered in the latter’s application. The new legislation essentially aims to simplify procedures and shorten decision-making periods. The decision-related criteria set out in this Decree Law endeavours to promote suitable territorial planning, protect the environment, enhance existing urban centres, promote skilled employment and help diversify retail supply. More in-depth information will be given in the chapter on legislation.

GLA per Region (2008) All Formats Region

GLA (sqm)

GLA Total (%)

North (excluding Greater Porto)

393,314

12.4

Greater Porto

669,968

21.1

Central Portugal

641,791

20.1

Greater Lisbon

830,450

26.2

Setúbal Peninsula

363,876

11.5

Southern Portugal

189,264

6.0

Azores and Madeira Portugal

84,582

2.7

3,173,245

100.0

Source: Cushman & Wakefield, December 2008

Forecast GLA per Region (2009-2011*) All Formats Region

GLA (sqm)

GLA Total (%)

North (excluding Greater Porto)

196,589

13.5

Greater Porto

194,489

13.4

Central Portugal

146,982

10.1

Greater Lisbon

474,048

32.5

Setúbal Peninsula

171,321

11.8

Southern Portugal

267,275

18.3

Azores and Madeira Portugal

6,000

0.4

1,456,704

100.0

Source: Cushman & Wakefield, December 2008 * Estimate

rua do carmo – lisbon

R e ta i l Sc h eme s The total supply of retail projects broke through the three million sqm GLA barrier in 2008 and was up 10% over the preceding year. 13 new projects, clearly dominated by shopping centres with a total area of around 310,000 sqm, or 83%, were developed. Particular reference should be made to the Greater Porto and Central Portugal zones with growth rates of more than 20%, responsible for more than 80% of the new supply. Planned GLA rates to 2011 continue to be as impressive as over the last few years. Projects in the pipeline during the referred to period represent around 1.5 million sqm, with the Greater Lisbon and Southern Portugal regions concentrating 51% of investment intentions. Owing to the current economic environment, we believe that many projects may fail to see the light of day, not only owing to natural selection deriving from a more mature market but also because of developers’ difficulties in securing finance. Although around 82% of planned GLA has been licensed, only 500,000 sqm of GLA are

MARKETBEAT currently under construction and there is a much uncertainty over whether all of the licensed projects will materialise. There are several rumours in the market concerning projects which are either being postponed or even abandoned by their developers, on account of these constraints. Growth in GLA (sqm)

Growth in GLA (sqm)

Accumulated GLA (sqm)

450,000

4,000,000

400,000

3,500,000

350,000

3,000,000

300,000

2,500,000

250,000

2,000,000

200,000

1,500,000

150,000

1,000,000

100,000

S ho ppi ng Cent re s

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* 2011*

Up to 1990

Retail Parks Evolution (2000-2011*) Growth in GLA (sqm)

Accumulated GLA (sqm)

350,000

1,000,000

300,000

800,000

250,000 200,000

600,000

150,000

400,000

100,000

200,000

Source: Cushman & Wakefield, December 2008 * Estimate

dolce vita tejo – lisboN

R e ta i l Parks There was a significant slowdown in the level of development of the retail park format in comparison to 2007. Only four retail parks, with an overall GLA of 47,000 sqm, were inaugurated in 2008. Capital Invest developed the largest project, Santarém Retail Park, with a GLA of more than 26,000 sqm. Mateus Group also opened two retail parks in 2008 – City Park Leiria and City Park Penafiel. Maprel, in turn, opened its Atlantic Park Carvalhos. Notwithstanding the probable postponement of several projects, seven new retail parks have been announced for 2009. These will include Montijo Retail Park, Portimão Retail Centre and M Retail Park in Maia.

2011*

2010*

2008

2009*

Year

2007

2006

2005

2004

2003

2002

2001

50,000 2000

This format is likely to be further affected by the current crisis and this will be a highly challenging year. The forecast slowdown in private consumption growth will naturally have an effect on retailer and developer activity. The struggle for market share among the larger projects will require careful manoeuvring, additional efforts by retailers and more proactive management in order to preempt any difficulties.

Year

Accumulated GLA (sqm)

Projects currently in the pipeline, notwithstanding the slowdown expected as a result of the uncertain market environment, comprise significant volumes of GLA and are expected to open in 2009 and 2010. The largest planned shopping centres include Dolce Vita Tejo and Espaço Guimarães in 2009, and Dolce Vita Braga, Aqua Portimão, LeiriaShopping and Fórum Sintra, in 2010.

Source: Cushman & Wakefield, December 2008 * Estimate

Growth in GLA (sqm)

The shopping centre segment remains highly active, exceeding even the dynamism of the last few years, with its highest ever level of new GLA at 260,000 sqm. This new record is largely the result of the opening of Mar Shopping and Palácio do Gelo which, with an overall GLA of close to 180,000 sqm are two of the largest shopping centres ever built in Portugal. These are the first InterIkea and Visabeira Group shopping centres in Portugal, respectively. FDO also opened its first two Vivaci Shopping Centres in Caldas da Rainha and Guarda, in 2008.

500,000

50,000 0

Accumulated GLA (sqm)

2008 ended with the announcement of Multi Development´s withdrawal from the Forum Leiria project, which was to have been developed in partnership with Lena Group. According to various announcements, the withdrawal derives from the discrepancy between the proposal submitted in the open tender issued in November 2006 and the current market situation.

Portugal Shopping Centre Evolution (1990-2011*)

Portugal | retail | Spring 2009

The apparent ease of developing this format, often in conjunction with less difficulty in terms of their licensing process, has led to rapid growth in the number of retail parks over the last few years. The fact that several Portuguese regions suffer from project oversupply has rendered leasing more difficult, while also putting rental values under pressure and increasing sales risks.

H igh Street Tr adin g If, in general terms, a more cautious approach has been noted in terms of demand for new units, high street trading appears to be the exception, with retailers demonstrating evident interest in this format. Chiado and Baixa (downtown Lisbon) clearly outperformed other zones in terms of demand and rental levels, in 2008. Notwithstanding the apparent shortage of available units, Chiado is most in demand particularly by fashion brands. City office zones, by their very nature, benefit from significant footfall, which also arouses the interest of retailers. Growth in demand in Parque das Nações and Saldanha was particularly noticeable, leveraged by such locations’ critical mass in attracting casual visitors. Avenida D. João II, in Parque das Nações, is the prime location for retailers looking for space in this Lisbon area. Reference should be made to the opening of the new El Corte Inglés Group Supercor unit in Office Parque Expo, last December. This project will house Lisbon’s new Justice Campus in 2009, with around 2,400 workers and with an expected daily influx of more than 4,000 visitors.

M ar k et Val u es Despite the apparent stability of prime retail rents, the current market situation bears very little resemblance to the past. The continuous increase in retail supply, the economic situation and retailers’ growing bargaining power, are squeezing average rents. This is exemplified by the fall of prime rents in retail parks to €10/sqm/month. There are, of course, several exceptions, particularly in prime projects with a limited supply of space whose developers have maintained past prices and whose shops, even nowadays, are virtually guaranteed high levels of sales.

Retail Prime Rents (2nd Half 2008) Format

€/sqm/month

Shopping Centre

Retail Park

High Street – Lisbon (Chiado)

High Street – Porto (Rua de Santa Catarina)

Source: Cushman & Wakefield, December 2008

Avenida da República, located between Saldanha and Campo Pequeno, is another of Lisbon’s high street trading location with growing demand. The shortage of available spaces in this thoroughfare has caused demand to spill over into adjacent streets such as Avenida 5 de Outubro, which also houses a significant supply of services and offices.

N e w Ent rant s As with other business areas, the current crisis also affords opportunities. This could be the perfect opportunity for a brand interested in expanding its range of outlets or making its first incursion into the Portuguese market. Developers are desperately looking for new angles and ideas, in most cases, are willing to provide inducements to mitigate a brand’s risk when entering a new market.

dolce vita braga – braga

2008 saw several new developments, with the market entry of Esprit, Red Oak, Loop, Uterqüe and Zilian, in the fashion sector and Chili’s and Starbucks in the restaurant sector.

MARKETBEAT OFFICE market Lisbon Office Map

Portugal | officeS | Spring 2009

2008 was yet another record year for Lisbon office occupancy rates with around 236,000 sqm of office space having been transacted, up 15.6% over 2007.

S u pply

This was not a run-of-the-mill year. As in all other property sectors, the effects of the national economic and financial crisis were keenly felt and affected the decisions of occupiers and owners alike. However, the major business transactions of the year, particularly the occupancy of Office Parque Expo by the Lisbon Courts, made an enormous contribution to the total number of square metres transacted.

Parque das Nações recorded the highest growth rates with a 32% increase of 74,000 sqm, almost all of which accounted for by Office Parque Expo, completed in the second half of the year.

Market prospects for 2009 are shrouded in uncertainty. Companies are clearly more attuned to cost control measures whatever the state of their finances. Tenants will continue to apply an ever increasing level of pressure for the renegotiation of agreements in addition to reductions of occupied space which will accompany the forecast of higher unemployment levels. Although demand will naturally be affected by the wider circumstances of the economy, expected occupancies by the Government and major state and semi-state owned companies, essentially in the utilities sector, may breathe some life into the market. Trends towards staff cuts and relocations to more competitively priced spaces are also likely to occur. This will create new businesses although fresh vacancies could lead to a negative balance on occupancy rates. In such circumstances, better quality projects whose owners are in a position to assume a commercially more aggressive approach, will enjoy greater prospects of success. Market dynamics over the last few years, in which developers have been gradually compensating for the oversupply felt in the first years of this century, have helped to improve the market’s preparation for this crisis. The vacancy rate in the Lisbon market has been falling since 2005 and although the trend was reversed in 2008, this indicator’s levels are much lower than in the more recent past. The fact that the volume of projects in the pipeline is not excessive, suggests that vacancy rate levels will remain stable. Rents were adjusted slightly at the end of the year, with a fall in prime rents to 19.5 €/sqm/month. Further adjustments may be made in 2009, with probable changes in prime rents. Average rents, particularly in less sought after zones, are likely to be the most affected. Adjustments to market prices are likely to be more evident in the type of incentives on offer, notably contributions to building works/repairs, staged rents and grace periods. These trends are frequently encountered in the Lisbon market whose owners endeavour to maintain nominal rent values at all cost. The most successful office locations in 2009 will be zones 5 (Parque das Nações) and 3 (New Office Areas), which are increasingly considered as a major alternative to the city centre by major occupiers, essentially owing to the volume of supply and more competitive rent levels. The CBD (Central Business District) could be affected, to a certain extent, in 2009, owing to the fact that its traditional occupiers operate in several of the sectors most affected by the crisis, i.e. financial and consultancy services.

The total office supply in the Greater Lisbon area, at the end of 2008, was 4.33 million sqm. This was 3% up over the preceding year.

New buildings were only completed in zones 4, 5 and 6, in 2008. Most such buildings were either owner-occupied or pre-let to a single occupier, with only 14,500 sqm still vacant. Office Park Expo, with 65,000 sqm, was the main project completion in 2008. This complex of ten office buildings, varying between three and eight floors each, was developed by Norfin. Its sole tenant is the Ministry of Justice. In a reversal to the trend which began in 2005, 2008 witnessed a 4.1% growth in vacancy rates over the preceding year to 8.48%. The major increase occurred in zone 1, with a vacancy rate of 11.21%. The traditional occupiers of this area have been badly affected by the financial crisis. The zone has been passed over in favour of several of the city’s outlying zones owing to the shortage of new buildings and high rental levels. In spite of continuing to suffer from the highest vacancy rates, special reference should be made to Parque das Nações which has succeeded in Total Office Supply in Greater Lisbon (2007/08) Total Supply (sqm) Zone

2007

1. Prime Central Business District

2008

565,420

566,901

1,043,676

3. New Office Zones

403,404

4. Secondary Office Zones

451,513

488,264

5. Parque das Nações

229,932

300,932

6. Western Corridor

847,501

865,379

3,541,446

3,668,556

662,285

656,699

4,203,731

4,325,255

2. Central Business District

Sub-Total (1-6) 7. Non-Consolidated Zones TOTAL Source: Cushman & Wakefield

Main Building Completions (2008) Project

Zone

Developer

Area (sqm)

European Maritime Safety Agency and European Drug Observatory

Lisbon Port Authority

Espaço do Infante

Realia Business

1,600

Panoramic Building

Orchidea

9,000

Office Park Expo

Norfin

Arquiparque II – Building A

Multi Development/Banif

3,200

My Office

Rebuilt

2,500

Office Estoril

IGS

3,800

15,000

62,000

Source: Cushman & Wakefield

MARKETBEAT maintaining the corrective trend, which began in 2006. The vacancy rate in this zone, at the end of the year, was 17.87%. As in zone 1, the “Western Corridor” also witnessed an increase in its vacancy rate to 15.66%. Historically favoured by companies requiring more space, staff-cutting measures are likely to have a greater impact in this zone. There continues to be a downturn in the future supply of office buildings, with completions of around 235,000 sqm expected by 2011. The above figures are indicative of developers’ ongoing adjustments to levels of market demand and the uncertainties related with the current situation. Many developers have taken the option to place their projects on hold and await more positive market signs.

Greater Lisbon Offices – Vacancy Rates (2007/08) 2007 25% 20% 15% 10% 5% 0%

The second highest level in terms of projects in the pipeline is zone 3, mainly owing to Torres Colombo. This project comprises two buildings, each with 29,000 sqm. The first building - Colombo Oriente - is expected to be completed in March 2009. Construction work is also likely to begin on the Metropolis project in 2009. This is being developed by Multi Development in Campo Grande, next to the Alvalade XXI Football Stadium (home to Sporting Lisbon). The licensing problems with the Lisbon City Council appear to have finally been resolved. The top news story is in the Central Business District, where construction work on the Amoreiras Jardim development is shortly expected to begin. Developed by Temple, this project, is a mixed office/retail/residential project. Its office area of around 17,500 sqm will compensate for the shortage of new quality supply in this area.

Zone 1

Zone 2

Zone 3

Zone 4

Zone 5

Zone 6

Zone 7

Source: Cushman & Wakefield, LPI

There has been a stagnation in the supply of new space in zones 1 and 4 with only small projects in the pipeline. These particularly include the Duque de Palmela 23 building, in zone 1, and the future headquarters of Banco BIG, in zone 4. Zone 7 also has a project under construction, Natura Towers.

Greater Lisbon Offices – Projects in Pipeline (2009-2011) 80,000 60,000 (sqm)

Parque das Nações continues to account for the lion’s share of future supply, with construction works on the Espace and Explorer buildings, with an area of around 15,000 sqm and the Báltico Office Centre, with around 12,000 sqm, having recently begun.

2008

40,000 20,000 0

Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7

Source: Cushman & Wakefield

Greater Lisbon Offices – Take-Up by Zone (2008) 2007

2008

100,000 80,000 60,000 40,000 20,000 0

Zone 1

Zone 2

Zone 3

Zone 4

Zone 5

Zone 6

Zone 7

Source: Cushman & Wakefield, LPI

DEMAND In an unusual development, given current circumstances, 2008 takeup levels, ending at around 236,000 sqm, look set to beat the record set in 2007.

Owing to the Ministry of Justice transaction, the zone with the highest occupancy level was Parque das Nações which recorded exponential growth over 2007. Around 90,000 sqm were transacted in this zone by year end. Reference should be made to the high level of activity in

Area (sqm)

GLA (sqm)

Number of Deals

120,000

180

100,000

150

80,000

120

60,000

40,000

20,000

0-100

101-500

501-1,000 1,001-2,000 2,001-5,000 Area

Source: Cushman & Wakefield / LPI

+5,000

Number of Deals

The major contributory factor already referred to is the Office Park Expo transaction, with a total number of 25 Ministry of Justice Department relocations this year. The high level of demand from public bodies during the course of the year was a decisive factor, accounting for around 43% of total take-up.

Offices in Greater Lisbon Transactions Ranked by Dimension (2008)

Portugal | officeS | Spring 2009

José Malhoa, 3-9 Taguspark Lagoas Park América Torres Colombo Adamastor Via República

00 ,0 70

00 60

00 50

00 ,0 40

00 ,0 30

,0 20

Palmela

Transaction types this year were somewhat unusual. Side by side with various major occupancies, there were also a larger number of small transactions of less than 500 sqm. Despite the drop in the number of transactions to 301, there was a major increase in the average area to 783 sqm, or around 170 sqm more than in 2007. The zone with the highest average area was, as usual, Parque das Nações, with 3,397sqm.

Office Park Expo Art’s Business Center

The Western Corridor office zone, for the first time since 2004 and in spite of having recorded the highest number of transactions, failed to take pole position and was the second most sought after area, with new occupancy of around 62,000 sqm. The main business transactions were the occupancy of 10,500 sqm in Taguspark, by the Foreigner and Borders Department (SEF) and the whole of the Atrium building by various Oeiras City Council departments.

Offices in Greater Lisbon Top Performing buildings (2008)

the Art’s Business Centre where, inter alia, a total area of more than 12,000 sqm was taken by BNP Paribas, DHL and Capital Mix. In the Adamastor building, around 4,500 sqm on 12 floors were occupied by the Bank of Portugal.

Transacted Area (sqm) Source: Cushman & Wakefield / LPI

Greater Lisbon Offices – Rents (2008)

MA RKET VALUE S The current economic situation and shortage of quality supply have had an effect on prime rents which fell slightly for the second time in 2008, ending the year at 19.5 €/sqm/month. High demand in Parque das Nações made it the only region to post an increase in the value of prime rents over 2007, at 18 €/sqm/month. Although companies are starting to show less interest in the “Western Corridor” zone, owners have succeeded in maintaining prime rent levels at 14 €/sqm/month, largely on account of the benefits/incentives offered to occupiers.

Zone

Average (€/sqm/month)

Prime (€/sqm/month)

Prime Central Business District

17.50

19.50

Parque das Nações

16.00

18.00

Western Corridor

12.00

14.00

Source: Cushman & Wakefield

Office Park Expo – lisboN

The need for companies to control fixed costs in 2009 is expected to involve lease renegotiations, as well as several instances of area downsizing, owing to the expected increase in unemployment. The increasing downward pressure on rents will affect owners in the “Western Corridor” and may spill over into the market as a whole, with owners endeavouring to entice their tenants with other types of contractual benefits.

MARKETBEAT INDUSTRIAL market Greater Lisbon Industrial Map Ota Torres Vedras

Azambuja Vila Nova da Rainha

Alenquer

Carregado

Mafra

V. F. XIRA

A10

IC 3

A10 22

AMADORA

LISBON

MONTIJO

ALMADA

OEIRAS

BARREIRO

IC 20

IC 2

Zone 1 - ALVERCA-AZAMBUJA

CASCAIS

Alcochete

IC 3

IC 16

MARL

LOURES

CREL

SINTRA

Alverca

Zone 2 - ALMADA-SETÚBAL IC 3

Palmela

Zone 3 - LOURES

A2 A12

Zone 4 - MONTIJO-ALCOCHETE Zone 5 - SINTRA-CASCAIS

SETÚBAL

SESIMBRA

Zone 6 - LISBON CITY 6 km 1cm

1cm

Main Industrial Locations – Greater Lisbon Area Zone

Axis

Zones

Alverca-Azambuja

Póvoa de Santa Iria, Alverca,Vila Franca de Xira, Azambuja, Carregado

Almada-Setúbal

Almada, Seixal, Quinta do Anjo, Palmela and Setúbal

Loures

4 5 6

Supply

Demand

4.00-4.75

High

Medium

3.00-3.50

High

Low

Loures, Odivelas, São Julião do Tojal, MARL

4.00-4.50

Medium

Montijo- Alcochete

Montijo and Alcochete

3.25-3.75

High

Low

Sintra-Cascais

Sintra, Cascais, Oeiras and Amadora

4.00-5.00

Medium

Low

Lisbon City

Between Sta. Apolónia and Parque das Nações

Low

Source: Cushman & Wakefield

Rent ranges (€/sqm/month)

–

Portugal | Industrial | Spring 2009

The industrial market in Portugal has, for many years, been dominated by the logistics sector which, in the 1990s recorded exponential growth. In sharp contrast, the 1980s and 1990s in the industrial sector were characterised by a gradual reduction in the national industrial fabric, with the relocation of manufacturing plants to Asian countries and, more recently, to Eastern Europe. The crisis was already evident in the industrial market, in 2008. Notwithstanding announcements of rental agreements for major logistics warehouses and the assembly of new manufacturing plants in the first six months of the year, the second half of 2008 showed that occupiers and investors were clearly taking a cautious approach, with few decisions having been made. The credit crisis had a considerable effect on this property sector, which specifically requires large amounts of finance. These buildings are normally customised and custom-built and financed by borrowing. The second half of 2008 witnessed longer decision-making processes with more demands from occupiers and more guarantees being requested by investors. The trend is expected to continue through 2009. The major transactions in 2008 were the leasing of 22,000 sqm on the Tiner logistics platform in Palmela by DHL/Excel, Modelo Continente’s occupancy of 14,000 sqm in Aveiras and a rental agreement for a logistics platform of 10,000 sqm for an occupier in the healthcare sector in the Figueira da Foz Industrial area. There are no longer any doubts about the impact of the economic crisis on industrial activity in Portugal, confirmed by successive announcements of manufacturing plants with enforced redundancies and production stoppages and others even at risk of closure. Logistics activity will also undoubtedly be hit, as sectors such as the automobile industry, textiles, pharmaceuticals and consumer goods, which, in 2009, will be highly impacted, are their major customers, representing around 50% of their turnover(1). Downturns in such important sectors of the Portuguese economy also have a direct effect on lower volumes for logistics operators, who, accordingly, will not only be poorly placed to take-up new space but, in extreme conditions, be forced to rationalise their current occupancy.

whose successful bidder was the consortium comprising Bento Pedroso, Mota-Engil Ambiente e Serviços, Espírito Santo Resources and OPCA. Following recent news regarding the need to reassess the Maia/Trofa Logistics platform, the response from the Government is to accelerate the development process of Leixões Logistics platform. This process of abandoning or postponing new projects has been a frequent occurrence in the industrial and logistics sector and derives from the small size of Portugal’s industrial market, which does not allow a level of growth similar to that of other real estate sectors. There has not been such a marked shortage of supply in the Greater Lisbon industrial market for many years. The vast majority of zones have now been consolidated. Demand is moderate, with several instances of oversupply. The Alverca-Azambuja axis is an area in which new projects are located with relative ease and which has come under the least price pressure. The Palmela area (zone 2), has, over the last few years, experienced a certain difficulty in leasing its product. The situation is likely to get worse, in 2009, owing to the crisis looming in the automobile sector. Although growth in the Loures zone also remains stagnant because of geographical constraints, reference should be made to the excellent accessibilities serving this area. After a certain momentary euphoria with the announcement of the building of the new Lisbon airport, the Montijo-Alcochete zone is also currently stagnant. Interest in this location should pick up as soon as the new airport is built. Some interest was recorded in the Sintra-Cascais zone over the last year. Its occupancy is highly geared to small warehouses and small chemical industries. Market rents, at the end of 2008, mirrored the difficult situation in the sector. No empirical conclusions can be drawn owing to the virtual non-existence of transactions, with the figures set out in the above table reflecting our opinion of the market trend. This trend, without doubt, comprises a downturn, owing to the difficulty in leasing space in Greater Lisbon as a whole.

IMOPÓLIS warehouse – Pousos, Leiria

The situation requires a rethink of the new logistics projects in the pipeline for the Greater Lisbon and Greater Porto areas. The “Portugal Logístico” programme had the objective of building 12 new logistics platforms in 2006. Four years down the line and construction work has begun on a single project. Construction of the Castanheira do Ribatejo Logistics Platform, developed by Spanish Group Abertis, is already underway with its main spaces being ready for occupancy in early 2010. The platform will comprise a total construction area of 500,000 sqm. The project will only be brought onto the market gradually over a ten-year completion period. Also in the “Portugal Logístico” terms, no date has, as yet been set either for the start of the works on the Poceirão Logistics platform, (1) Data published in the Ranking and Atlas of Logistics Operators, 2008

MARKETBEAT HOTelS market Although the tourism sector was slower than others to feel the effects, there is no doubt that the economic slowdown had a major effect on the Portuguese hotel sector in 2008 (and will continue to do so throughout 2009). Annual hotel demand was considerably down, owing to the fact that both the UK and Spain, as Portugal’s main source of tourists, were the European countries most affected by the crisis. Reference should also be made to the special case of the British who, owing to Sterling’s major depreciation against the Euro, lost out on purchasing power within the Eurozone. This particularly affected demand for such tourism destinations as the Algarve, in addition to residential tourism property sales. Tourism demand is likely to drop sharply in 2009, with a reduction in number of tourists and distances travelled and preference for incountry or closer destinations. Relatively peripheral destinations, such as Portugal, may be seriously affected. Aviation companies, as a fundamental link in the tourism value chain, were badly affected by the global crisis and particularly so in the first half of the year when fuel prices hit all-time highs. This required various supply adjustments, particularly on the less profitable flight routes in which they were forced to cut capacity. There has been scant news over the last few months of new investments in hotel supply side terms notwithstanding the fact that the number of new hotels opening in 2008, was similar to that of previous years. Little is expected to change in 2009. Difficulties in securing finance is one of the most obvious reasons for the postponement, or even cancellation, of new hotel investments. The drop in hotel performance levels also requires a focus on day-today management and the definition of strategies to counteract falling demand whose effects are already being felt and which are likely to continue through the whole of 2009. No drastic price cutting is, as yet, evident, although as the year progresses and considering the expected drops in occupancy rates, several hotel owners may be forced to adopt this kind of measure.

The number and volume of hotel transactions, in 2008, in Portugal, was relatively small and is expected to remain so in the first half of this year. The second half of the year is, however, likely to witness several M&As with the assimilation of independent or smaller hotel units into larger hotel networks/chains and/or groups.

ANALYS I S O F MAIN INDICATO R S The main tourism indicators, in Portugal, reflect the difficulties experienced in the sector, in the second half of 2008. In spite of the reasonably satisfactory results achieved in the first half of the year, the end of year data confirms the effect of the international crisis on this strategic sector of the Portuguese economy. Hotel revenues were up by only 1.2% in 2008, a growth rate much lower than the 11% seen in 2007. The 1.3% drop in the number of room nights produced a corresponding impact on hotels’ revenues per room night, with an increase of no more than 2.5%, or half of the 2007 increase. Room nights figures varied considerably according to the respective region. The Azores, Algarve and Lisbon areas were clearly the most affected by lower demand, as opposed to Madeira, which succeeded in achieving a considerably higher than national average growth in room nights, in 2008. Growth in the Northern, Central Portugal and Alentejo regions was practically flat over 2007. The number of new hotels opening is equivalent to that of the last few years and has not been affected by the crisis being felt in the sector. Thirty new hotels opened in Portugal last year, adding around 3,600 rooms. Most of these were 4 and 5 star hotels with a greater concentration in the Northern and Greater Lisbon regions. As in the case of indicators relating to hotel demand, different levels of air traffic volumes have been recorded by the three main national airports. Growth in Madeira and Lisbon was positive, albeit moderate, at around 1.2% and 1.6%, respectively. However, there was a reduction in passenger numbers for the Algarve, which was undoubtedly the region most affected by the international crisis in 2008. This is easily

National Tourism Indicators (2007-2008) Indicators

2007

2008

Average Annual Growth

Passenger Movements – Airports (Million)

26.7

27.4

2.7%

Guests (Million)

13.4

13.5

0.7%

Room Nights (Million)

39.7

39.2

-1.5%

1,943.6

1,960.4

0.9%

48.91

50.06

2.4%

Hotel Revenues (Million €) Hotel Revenues per Room Night (Million €) Source: INE and ANA; Cushman & Wakefield analysis

Growth of Room Nights in Hotels, by Region (2007-2008) Year

Total

North

Center

Lisbon

2007

-5.8%

10.0%

9.8%

2008

-1.5%

0.3%

0.6%

Source: INE; Cushman & Wakefield analysis

Alentejo

Algarve

Azores

Madeira

-6.3%

12.3%

-3.8%

-0.4%

4.6%

-3.0%

--0.7%

-3.4%

-4.8%

3.4%

Portugal | Hotels | Spring 2009

explained by the economic situation in the UK and Spain, as Portugal’s main source of tourists. The Algarve and Madeira are the holiday destinations visited by the highest number of international tourists and the Algarve is naturally the first to have felt the effects of the crisis. We consider that the exception of Madeira is explained by the new low cost air routes beginning in 2008, in addition to the particular type of tourism in this zone characterised by repeat business from more mature customers who are less vulnerable to the effects of the crisis.

The increase in the number of passengers in Lisbon derives from the increase in the number of low cost flights to the capital.

INV E S TMENT Hotel investment was badly affected by the financial crisis in 2008 and almost all investors had greater difficulty in securing finance. Consequently, several transactions failed to materialise in the second

Main New Hotels (2008) Hotel

Location

Category

Buyer

Seller

3 stars

JP Caetano, S.A.

n.d.

118

4 stars

Grupo Baía Grande

International Investor

154

4 stars

The Lince Hotels & Resorts

Grupo Bensaúde

n/a

5 stars

Pedro Queiroz Pereira

Grupo Volkart

4 stars

Sagres Holidays - Ian Howard

n.d.

139

4 stars

AA-Iberian Natural Resources & Tourism S.A.

Espírito Santo Saúde

4 stars

Grupo de Empresários Estónios

n.d.

Source: Cushman & Wakefield

Porto Santo Golf Club House – Porto Santo

hotel cristal – carvoeiro

Portugal | Residential | Spring 2009

RESIDENtIAL market 6.00 5.00

Maximum – 5.38

4.36

4.00 3.00

Minimum – 2.97

ar -0 8 Ap r-0 8 M ay -0 8 Ju n08 Ju l-0 8 Au g08 Se p08 O ct -0 8 N ov -0 8 D ec -0 8

2.00

In 2009, despite the reduction in Euribor rates, consumers’ low “feel-good factor” levels, largely deriving from uncertainties related to job stability, will have a major constraining effect on a Portuguese family’s decision to buy a home. 2009, for the vast majority of the Portuguese population, will not be a year of investment in consumer durables such as housing. The “wait-and-see” approach will certainly have an effect on the residential sector.

Source: ECB (European Central Bank)

Ur b an Resi dent ial

-40.0

-30.0 -31.0

-35.0

-45.0 -48.2

8 -0 ec D

08 pSe

-0 Ju n

ar -0

7 D

-0

07 p-

7 -0

7 ar -0

Ju n

• Withdrawal from the state of denial and vendors’ acceptance of the fact that a more flexible negotiating approach would be conducive to successful business transactions.

-0

-50.0

A smaller number of transactions was recorded in the urban second hand residential housing market, although there was a certain level of adjustment to effective sales prices at the end of 2008. There are two essential reasons for the adjustment:

Consumer Confidence Evolution (deC / 2006 - deC / 2008)

The large differences in the Euribor rate between September and December 2008, have still not been sufficient to stimulate a market which, during last year, had to face a very different reality from that of the last few years.

6-month Euribor Evolution (2008)

Jan -0 8 Fe b08

The Portuguese residential scene in 2008, was particularly affected by rising interest rates in the first nine months of the year, combined with increasingly restrictive lending policies. After an initial stage involving an attitude of denial by developers and a “wait-and-see” attitude by purchasers, the last few months of the year have confirmed that the residential market is one of the first in Portugal to reflect the worldwide financial crisis.

Source: INE (National Statistics Office)

• The unpostponable need to sell, deriving from interest rate increases, often worsened by having to pay two mortgages when a new home is purchased and the old home has not been sold.

expectations from those currently in force, the sales prices announced for new houses became even more expensive in relation to a market with less liquidity and growing difficulty in securing credit.

The government announced the creation of “FIIAH” - Real-estate Investment Funds and Companies for the Residential Rental Market to protect families with the greatest difficulties in making their mortgage payments. The fund pays off the mortgage and then, as the home’s owner, allows the former borrowers, now tenants, to pay rent instead of monthly mortgage payments. This eliminates such property ownership costs as IMI (municipal property tax) and insurance required by traditional mortgages.

As expected, the climate of instability and particularly higher lending costs increased demand for rentals, as an option for owners unable to sell their homes and for those without the financial capacity to purchase them.

This measure, which also includes the possibility of home repurchases, should have been introduced long ago. It was only published in the Diário da República(2) on the last day of 2008, at which time, interest rates were at an all-time low. The second half of the year was even more critical in terms of the urban residential market for new homes. With a very sluggish market for second hand homes and no significant adjustments to sales prices, the last few months of 2008 were characterised not by a slowdown but rather by an almost total stoppage. With an end-product deriving from the purchase of land at prices based on very different market

With the growing difficulties in securing finance and the fall in sentiment as a result of many consumers having taken on too much debt and facing the possibility of unemployment, 2009 is hardly likely to be positive in terms of residential market dynamics in Portugal. For people with job stability and not interested in moving home, 2009 will be an easier and less stressful year than 2008, owing to today’s interest rates and inflation levels which are expected to remain at all-time lows for some time. However, families needing mortgages in 2009 will have great difficulty in terms of the approval process, avoiding the need to make down payments of between 20% - 25% and achieving spreads equivalent to those of the last few years. 2009 may well be a year of opportunity for those not currently home owners, but only if they do not need a mortgage, at least for the full amount of the property’s value.

(2) Portuguese Government Gazette

MARKETBEAT All this leads us to believe that 2009 will be an excellent year for rentals with demand likely to remain at, or even outpace, 2008 levels. The desirable supply, either in terms of quantity or quality, is not expected to keep pace with this demand. In 2009 the rental market may not only be an alternative for developers but also for owners or those searching for housing solutions. It is obvious that without a serious revision of the NRAU (“New Urban Lease Law”) and fiscal policy on urban lettings, this opportunity may never be exploited. We also consider that the trend towards the redevelopment of buildings will also be maintained, although special attention should be drawn to the cost of urban buildings, in light of a still uncertain future market situation. For current projects which must be sold in 2009, a serious analysis of list prices and negotiating policies is suggested, always in due respect for the commercial relations between developers and owner families or promissory purchasers of such developments.

R e s identi a l Tourism

marketing terms with other crucial factors including greater negotiating flexibility, breadth of product supply and the need to pay much greater attention to the activities of competitors in a year in which each potential customer should, more than ever, be considered a rare business opportunity. There are also likely to be changes in the type of demand, with a greater inclination towards lifestyle options, such as purchases for own use and less for investment purposes. In particular, we believe that a property’s price/quality ratio, an open attitude and quality of services will play a critical role at the time of decision. The often proclaimed “guaranteed income” or appreciation value of a property, exclusively made by the international brand responsible for managing the project, is no longer a credible sales pitch. Even with the many uncertainties and the future dynamics of demand for second homes, we believe that Portugal will remain at the forefront of international market preferences and has the potential to outperform neighbouring Spain, which presently needs to deal with a serious problem of oversupply. It should, however, be noted that earning “European California” status without a serious and consistent policy for promoting Portugal abroad, will be no easy task.

The currency depreciation, in the case of the UK market, has not only affected real property costs but also and no less importantly, Eurozone living costs for the UK population. This is a crucially important factor for people deciding to purchase a second home abroad, whether for investment, holidays or extended stays. The above factors are also compounded by the fall in the value of real estate and increased unemployment in the UK and Ireland, causing a retraction of the two main residential tourism product markets, confirming the trend noted in the second half of 2007 and the first half of 2008. The Irish market, which is not exposed to foreign exchange devaluation, has virtually disappeared or at least is much less active than it was up to 2007. This “disappearance” is explained by the profile and small size of the market and its current portfolio of international properties which were purchased at prices which would, nowadays, be difficult to achieve.

Existing supply for 2009, including several of the preceding year’s project launches, are clearly more than enough to provide for such weak demand. Careful investment choices are recommended in

1.60

1.49

1.40 1.20 1.05

Source: ECB (European Central Bank)

(Contribution by Ricardo Roquette, independent property consultant)

8 ec -0 D

p08 Se

-0 Ju n

8 ar -0 M

7 -0 ec D

07 pSe

-0 Ju n

7 ar -0 M

-0

1.00

The year ended with the sine die postponement of projects which have already been announced and the financial difficulties of several projects currently on the market. These situations may provide good opportunities for people interested in investing in the residential tourism domain and who wish to take advantage of low sale prices this year which we believe could offer interesting opportunities.

Pound Sterling vs. Euro exchange rate

In terms of solutions, although 2008 saw much discussion of “alternative markets” such as joint ownership and timesharing systems, these options, even if rationally sustained, will take some time to prove their worth in providing a fresh boost to sales of residential tourism products.

Portugal | Investment | Spring 2009

INVESTMENT market

Institutional investment in real estate is closely linked with credit markets, leverage is important for any investment business, for which reason the financial crisis whose effects began to be felt in the second half of last year and are still being felt, had an immediately negative effect on the sector. The volume of assets traded during the year were slightly more than €500 million, 60% down over the preceding year. Only 36% of the total annual volume of transactions took place in the second half of 2008, in a market trend reversal in which between 60% and 70% of transactions are usually completed in the second half of the year. This confirms the duality existing in the investment market, in 2008, an active first half and a second half with virtually no transactions. The second half also witnessed disparate levels of activity. The third quarter began with a less negative market attitude and information on the strong liquidity of German funds, intending to make acquisitions in Europe. The considerable number of redemptions made to such funds in the last few months of the year put paid to this aggressive purchasing approach and the market’s remaining hopes.

Domestic vs. International Foreign Investment Domestic Investment

Foreign Investment

1,400 Total Investment (e Million)

Like the residential market, the investment sector, which is universal to all property sectors, was one of the first to feel the effects of the current worldwide financial and economic crisis, in terms of day-to-day operations. As opposed to the occupational market, which in 2008 maintained high activity levels, starting in the third quarter last year, the investment market began to record a retraction. National funds were clearly experiencing liquidity difficulties in addition to a much more cautious approach to decision-making by foreign investors.

1,200 1,000 800 600 400 200 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Cushman & Wakefield

Investment by Sector Industrial Retail

Residential Office 3.8% 2.5%

Mixed Use

Other

12.9%

17.3%

Sources of investment were similar to previous years, with foreign investment accounting for around 50%. There was, however, a change in the type of business, with a higher frequency of lower value transactions. The average transaction value, in 2008, was less than 10 million euros and was this indicator’s lowest value of the decade. 22.8%

I n v e stment by Se ctor The sector with the highest volume of investment in 2008, was offices, responsible for around 40% of the total volume. Retail investment mirrored the greater caution shown by investors in this type of property and who invested slightly more than 20% of the total amount in this sector, for around 100 million euros. Reference should also be made to the approximate proportion of 13% allocated to other uses almost all of which comprising investments in healthcare properties.

40.6%

Source: Cushman & Wakefield

Market prices were inevitably squeezed in the second half of 2008. In comparison to closing prices at the end of 2007, market yields at the end of the year reflected a 75 base points increase in offices and shopping centres, and 100 base points in retail and industrial parks.

Prime Yields (2008) Sector

2007

2008

I n v e stment Funds

Offices – Gross Yield

5.75%

6.50%

The national real-estate funds industry, in December 2008, had a total of 231 funds managed by 37 fund managers responsible for 9.3 billion euros in assets. This figure is slightly down over June 2008, when the indicator was 9.5 billion euros.

Retail – Shopping Centres – Net yield

5.00%

5.75%

Retail – Retail Parks – Net yield

5.75%

6.75%

Industrial – Gross yield

7.00%

8.00%

Source: Cushman & Wakefield

MARKETBEAT Fundimo was the fund manager with the highest volume of assets under management at the end of 2008, with a market share of 12.7%, followed by Interfundos and ESAF, with market shares of 10.7% and 10.1%, respectively. The ten largest fund managers accounted for more than 70% of the industry total at year end. The sectors most in demand by national funds are offices and industrial which account for more than 50% of total funds under management with retail properties only accounting for 16%. There have been no changes in this allocation of assets by sector of activity over the last few years. In terms of portfolio composition vis-à-vis real estate assets and other investments, reference should be made to the growing evolution of the proportion of debt by national property funds. Since June 2006, in which property investment funds recorded average debt levels of around 14%, there has been a growth in such vehicles’ gearing which, at the end of the first half of 2008, was 20%. Fund liquidity was also down over the period 2006/2008 from 6.4% in 2006 to 5% in June 2008.

Property Fund Managers Market Shares (%) Banif Gestão de Activos Norfin Outros Sonaegest ESAF BPN Imofundos 7,1%

9,5%

National investment funds are expected to experience the same liquidity problems as in 2008, with several one-off aggressive marketing strategies having already been launched to secure funds. Sale & leaseback operations by companies whose core business is not in real estate is a trend which has had limited application in the Portuguese property market, to-date. This strategy can, in many cases, alleviate corporate balance sheets, releasing funds to other areas. Greater consideration could be given to this strategy, in 2009, in which liquidity will be a crucially important factor. Portuguese executives have, to-date, resisted this option which usually occurs when companies are in dire financial straits and investors are naturally reluctant to run the risk of a tenant’s cancellation.

6,4%

6.4% 3,5%

3.5% 10,1%

3.0% 2.9%

10.1%

3,0% 2,9%

10.7% 10,7%

30.1%

30,1%

12.7% 12,7%

Source: CMVM

investement by sector Residential

Retail

Services (Business Space)

Other

4% 16% 29%

The most attractive properties will undoubtedly be prime assets in good locations with good tenants, supported by secure rental agreements. The most sought-after sectors of activity will be offices and high street retail operations with an expected reduction in demand for shopping centres being expected. The industrial sector, traditionally sought out by national investors, is beginning to attract the interest of foreign investors, albeit always related with logistics activities, in prime locations and whose dimensions justify purchases being made outside the country of origin. In all sectors and with all type of assets there is one fact that must be fully hoisted on board by all parties in the market. Since the Summer of 2008, and for reasons which are perfectly obvious, the situation is drastically different and market prices must adjust accordingly.

6,5%

6.5%

9.5%

F UTURE PE RSPECTIVES Major foreign investors are expected to tip-toe back into the market in 2009. They are relying upon liquidity and expect better financing terms from credit institutions. Purchasers, however, will be much more cautious and the decision-making process will be long and much more demanding.

7.1%

Millennium bcp Gesfimo Fundimo Interfundos Santander Asset Management

51% Source: CMVM

REAL-ESTATE INVESTMENT FUND PORTFOLIOS Liquidity Leverage Properties Real Estate Investment Funds Investment Units and Shares in Real Estate Companies 100% 80% 60% 40% 20% 0% Source: CMVM * June 2008 Data

2000

2001

2002

2008*

Portugal | LEGISLATION | Spring 2009

LEGISLATION Changes to the respective sector legislation include the new legislation on “FIIAH - Real-estate Investment Funds and Companies for the Residential Rental Market which could affect the day-to-day operation of national investment funds owing to the more favourable approach to home investment in this legislation. More in-depth information will be provided in the next chapter. Market prices will inevitably keep falling with a new increase in yields being expected in the first half of the year, particularly for non-prime assets. This upwards adjustment to yields should be in the average region of 50 base points and common to all sectors. The second half of the year is expected to witness greater stability, based on expectations of a modest return of bank finance, albeit restricted and better adjusted to the risk on underlying assets.

C o mmer c ial L ic en s in g Decree Law 21/2009, setting out the new legislation on the licencing of new and existing retail projects and units was promulgated on 8th January last. The decree, based on a revision of Law 12/2004 of 30th March, comes into force on 19th April 2009. Its revision was forecasted within a three year period from coming into force, following an evaluation report on its application. The main objective behind the revision of Law 12/2004 was to simplify and increase the flexibility of the licensing procedures, in addition to including, or reinforcing certain specific aspects of decision-making criteria. The new regulation attaches greater importance to issues related to territorial planning, environmental protection, enhancements to urban centres, job creation and developers’ social responsibilities. The following is a list of the main alterations brought in by Decree Law 21/2009: • Exclusion of wholesale companies and micro companies from the authorisation regime; • Inclusion of expansions or modifications of retail spaces in operation in the authorisation regime; • Requirement to obtain approval of advance information on location; • Requirement to submit an approved declaration of environmental impact, in cases required under urbanistic licensing procedures; • Continuous decision-making process, eliminating the staged candidatures system; • Decision to be taken by a single body, the commercial authorisation committee (COMAC), which shall issue a monthly decision on NUT III level applications (municipal district combinations). Alterations to establishments needing to apply for the licensing process were also made, with the following being subject to the authorisation regime:

ROSSIO STATION – LISBON

• Retail units with a sales area of 2,000 sqm or more (the former legislation defined an area of 500 sqm); • Retail units belonging to a company or group using one or more designations with an overall national sales area of 30,000 sqm (the former legislation defined an area of 5,000 sqm); • Schemes with a GLA of 8,000 sqm or more (the former legislation defined an area of 6,000 sqm); • Units and schemes referred to in the preceding sub-paragraphs, wishing to restart operations, after a period of inactivity of more than 12 months. The change of greater market relevance in the law is the inclusion of the modifications of retail units and developments in the commercial licensing procedure, including the following situations: • Change of location of units except for interior changes to retail spaces, not entailing an increase in the size of the sales area;

MARKETBEAT • Change to the type or increase in the size of the sales area of a retail unit;

The following is a list of the main aspects of this regulation which sets out the standards regulating these investment vehicles:

• Change of designation (brand) or designated owner of establishments, when not occurring within the same group;

• FIIAH - Real-estate Investment Funds and Companies for the Residential Rental Market should be made up of a minimum amount of 75% of real estate assets located in Portugal to be used for a permanent home rental basis;

• Change of location or type of developments or increase in their GLA. There was a slight reduction in the installation and modification charges for establishments and retail spaces. Fines for non-compliance were considerably increased. The current rates are as follows: • Authorisation charge for retail units is 30 €/sqm of authorised sales area, except for units operating in developments, in which the amount is 15 €/sqm; • Authorisation charge for developments is 20 €/sqm of authorised sales area, subject to a maximum of 1,000,000 €.

F IIAH – Real-e state In ve stment F un ds and Com panie s for the r es i dential Rental Mar ket Ministerial Order(1) 1553-A/2008, regulating the new real estate vehicles in Portugal, all of which fully geared to the residential sector, was published on 31st December 2008. The Ministerial Order came into force on 1 January 2009 and applies to Real Estate Investment Funds and housing real estate investments(2). The measure was announced by the government in September 2008. Its primary intention was to act as a counterweight to the continuous increase in Euribor rates (used as a reference rate for mortgages in Portugal) and its impact on family budgets. Notwithstanding the measure’s undeniable value, it came far too late as, if the Euribor(3) rate was close to 5.5%, in September 2008, on the last day of the year the said reference rate had fallen considerably to less than 3%. This measure, however, will still be a good alternative for families which, in more adverse economic circumstances, could consider it as a solution to the current problems involved in selling their homes on the open market. Although the legislation is lacking in this respect, it could also be used as an alternative for developers who are unable to sell their products, by placing them with a FIIAH. We believe that this would have been a good measure several years ago when Euribor was at an all-time high but that, nowadays, its effects will not be so practical or relevant. We consider that this law’s major drawback is the absence of a more effective instrument to combat non-payment of rents, which is undoubtedly the main obstacle to rental market development in Portugal and the government has once again skipped the issue. Items 3 and 4 of article 4 contain a minor proviso which is incapable of remedying the problem.

(1) “Portaria” (2) Created under legislation to be published (3) 6 month Euribor rate

• The property’s purchase price should be agreed between the parties but may not be higher than the amount determined by valuation experts; • The amount of the rent is also agreed between the parties and shall be increased in accordance with the annually published coefficients. No reference is made to the terms of the rental agreement, which shall therefore be subject to the NRAU (“New Urban Lease Law”). • The tenant shall enjoy a purchase option on the property at any time by giving an advance notice of 90 days. The amount of the purchase option is the amount of the initial sale increased by the HCPI (Harmonised Consumer Price Index). If this option is exercised within a period of two years from purchase by the fund manager, the amount of the purchase shall be increased by the costs borne to-date by the FIIAH; • If the tenant decides not to exercise the purchase option at the end of the agreement or on the date of any early termination thereof, he/she/it is, nevertheless, entitled to receive any capital gains made by FIIAH on its sale of the property to third parties. These capital gains shall, however, be set against any outstanding and unpaid rents and the costs involved in selling the property. The capital gains are payable to the tenant within a maximum period of two years from the termination of the agreement even if the FIIAH has not sold the building.

Portugal | about us | Spring 2009

cushman & wakefield Cushman & Wakefield is one of the world’s largest commercial real estate services firms. Founded in 1917, the firm has 221 offices in 58 countries, and 15,000 talented professionals. Cushman & Wakefield delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, lenders and investors through every stage of the real estate process. These solutions include representing clients in the buying, selling, financing, leasing and managing of assets. The firm also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services.

Managing Partner Eric van Leuven

eric.vanleuven@eur.cushwake.com

River Tagus

contacts

Retail Sandra Campos

Offices Carlos Oliveira

Industrial & Land Ana Gomes

Hospitality Jorge Catarino

Capital Markets Luis Antunes

Research & Consulting Marta Leote

Valuations Ricardo Reis

Asset Management Ricardo Valente

Project Management Matthew Smith

Residential – Independent Consultant Ricardo Roquette

sandra.campos@eur.cushwake.com

marta.leote@eur.cushwake.com

carlos.oliveira@eur.cushwake.com

ricardo.reis@eur.cushwake.com

ana.gomes@eur.cushwake.com

ricardo.valente@eur.cushwake.com

For further information or additional copies of this or other reports, please contact: Ana Silva, Marketing Manager ana.silva@eur.cushwake.com Cushman & Wakefield Av. da Liberdade, 131‑ 2º 1250‑140 Lisbon – Portugal Tel.: +351 21 322 47 57 Fax: +351 21 343 21 17

jorge.catarino@eur.cushwake.com

matthew.smith@eur.cushwake.com

luis.antunes@eur.cushwake.com

r.roquette@meo.pt

This document contains general information and it has been used by Cushman & Wakefield on the assumption that is it is correct and accurate. Cushman & Wakefield declines all responsibility if this is not the case. No warranty or representation, express or implied, is made as to the accuracy of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental, or other conditions, and withdrawal without notice or at the request of our clients. For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield’s Knowledge Center at www.cushmanwakefield.com/knowledge © 2009 Cushman & Wakefield. All rights reserved.

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