A positive economic growth story is persuading property investors to look again at Portugal. ING’s recent €43.5 million financing of US investor Marathon Asset Management’s debut deal in the market – for a Lisbon office portfolio – highlights the opportunity the country’s real estate market presents for property lenders.
Although it is small and less liquid than those of several other European countries, there has been an impressive pick-up in investment over the past three years – particularly in Lisbon and Porto. Senior lenders struggling to find core assets in prime locations, therefore, should have Portugal on their radar. Debt providers with appetite for riskier assets, meanwhile, are also likely to find opportunities.
Here are five reasons for real estate lenders to consider Portugal now:
1. It is on an economic rebound: A surprise growth story over the past two years, the Portuguese economy, under a minority socialist government pursuing anti-austerity policies, has experienced great momentum. The country posted GDP growth of 2.7 percent last year – the highest upsurge of this century – and a 2.2 percent increase is projected in 2018, according to advisory firm Oxford Economics.
2. It is tipped for a record year of investment: Real estate transaction volumes are set to hit record levels in 2018, with an expectation that they will grow 18 percent to €2.6 billion, according to CBRE. Foreign investors remain dominant in Portugal, representing almost 80 percent in 2017, JLL data show. Investors in recent years have been largely opportunistic, although sources note an increase in activity in the core segment, potentially creating a wider array of financing opportunities.
3. The office market is picking up: Portugal’s office market registered one of its most active years of the past decade during 2017, with a take-up level of 166,819 square metres, up 14 percent, year-on-year, according to JLL. Lenders are increasingly supporting investors’ appetite for office assets, thanks to strong demand from multinational firms of back-office services. In addition, offices are set to benefit from a further decline in the vacancy rate and a rise of prime rents, due to a lack of product. Meanwhile, lenders should expect more financing deals in high street retail and alternative sectors such as student accommodation.
4. Margins offer a premium: Senior lenders providing conservatively leveraged loans to retail and office assets can price loans at around 2 percent, sources say. Traditionally, Portugal has had a 100 basis points premium over neighbouring Spain, although this differential is tightening. As local lenders gradually resolve their solvency issues, they are expected to compete with foreign-headquartered lenders such as ING or domestic banks owned by Spanish groups like CaixaBank’s Banco BPI and Santander Totta. Although competition is bringing margins down, a premium to more established markets is expected to remain.
5. There is a gap for higher-risk finance: Banks operating in Portugal are largely limiting their lending to senior debt, which leaves room for debt funds or more flexible lenders to finance higher-risk deals involving value-add properties, or acquisition of land for developments. “Local banks are not ready to finance mezzanine loans or riskier assets. These deals are now for investment banks operating from London or debt funds,” a senior banker operating in the country notes. As lenders become increasingly familiar with Southern Europe, those seeking value-add business should keep a close eye on Portugal.