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For the past few years, Portugal’s celebrated fado singers have had plenty of inspiration for their melancholy tunes and lyrics given the sorry state of the country’s economy.

But with the semana santa – or holy week – upon us, there is every reason to talk about a resurgence, if not a resurrection, of Portugal’s real estate sector.

In recent months, Spain’s smaller Iberian neighbour has exited the Troika’s adjustment programme and laid down its economic cross after reporting higher levels of consumption and a better than expected unemployment situation. The country’s property deal machine has also started to rev up and Cushman & Wakefield now expects real estate investment in Portugal to surpass the €1 bn mark in 2015.

This would make it one of the highest figures on record, according to Luis Antunes, head of C&W’s capital markets in Portugal. It would also represent a nearly 43% increase on 2014’s levels of €704 mln and about three times as much as 2013, when only €320 mln were transacted in the market. In 2012, Portuguese real estate reported as little as €100 mln of activity.

Volumes spiked in Q4 2014 with the best quarter since 2007 delivering a year-end total of €678 mln, 110% up on 2014. The bulk - or 86% - of this was investment by foreign players compared to an average of 37% over the previous five years.

‘We are seeing interest from traditional investors from Germany, Spain, the UK and the US as well as from new geographies such as China, South Africa and Brasil,’ Antunes told PropertyEU. As a result of increased activity and growing demand for assets, prime retail yields have already compressed by around 100 basis points from 7.5% previously to about 6.5% at present while prime office yields are currently at around 6%.

‘The big story this past year has been the periphery of Europe, like Ireland and Portugal, coming back strongly,’ agrees Richard Holberton, director of EMEA Research at CBRE.

US investors head the charge
In 2014 the largest deal in Portugal was US investors Blackstone’s purchase of more than €200 mln logistics and retail property assets portfolio from Espírito Santo Fundos de Investimento Imobiliário (ESAF), the fund manager of Novo Banco Group - previously Banco Espirito Santo. The Portuguese government recently bailed out the failing lender and has broken it up into a good bank and bad bank in line with the successful strategies of the Irish and Spanish asset management agencies.

In the retail sector, Carlyle sold the Freeport Outlet Alcochete to the VIA Outlets joint venture, the main asset of a European portfolio comprising three outlets; while the US Alaska Permanent Fund Corporation bought 50% of Alegro Alfragide from Immochan.

More deals are on the way. PropertyEU recently revealed that an international consortium has put Lisbon’s Torre Ocidente on the market with a price tag of over €70 mln. The four owners - Caixa Geral de Depósitos Group, Iberdrola Inmobiliária, CBRE Global Investors and Sonae Sierra - have hired Cushman & Wakefield to market the scheme which provides 29,000 m2 of gross space over 14 floors. It is located next to the Centro Colombo retail centre, a major shopping destination in the Portuguese capital, and its twin Torre Oriente, which was bought by Union Investment Real Estate in 2010 for its open-ended real estate fund UniImmo: Global. The deal marked Union Investment's debut on the Portuguese real estate market.

Another large-ticket transaction in the pipeline centres on Dolce Vita Tejo, the largest shopping centre in Portugal worth some €200 mln. According to well-informed sources, UK group Eurofund Investments and US private equity firm Baupost are in the running for the acquisition.

So far this year, opportunistic US investors have led the wave of cross-border investors in Portugal. In January, Spanish mall operator Neinver announced it had teamed up with US private equity group Colony Capital for a €200 mln logistics joint venture. The duo has already signed the first acquisition in the Iberian Peninsula with the purchase of a portfolio of 16 logistics sites in Spain and Portugal spanning almost 110,000 m2 in a sale-and-leaseback transaction. As part of the JV, Neinver will manage the assets, while Colony Capital will contribute its real estate and financial expertise to grow the portfolio.

While Neinver’s strategy has in recent years been centred on the retail sector, the company has developed and managed industrial properties ever since it was founded, the group's chief financial officer Carlos González told PropertyEU. González claims logistics in Spain and Portugal has now greater growth potential than almost any other real estate market. ‘Traditionally it is one of the sectors that benefit first from the economic recovery. We think this is the right time to invest in profitable, productive, assets that are under development.’

Development is becoming an option
As confidence improves in the country, there are signs that other investors are prepared to move up the risk curve and engage in new developments. Just this week, US private equity firm Lone Star announced it has acquired Garvecat, the company responsible for the development of the Vilamoura resort in the Algarve region of Portugal. The deal, one of the largest real estate transactions in Portugal, was carried out on behalf of Lone Star Real Estate Fund III.

Financial details were not disclosed, but Lone Star said that the acquisition represents the 'largest real estate transaction in Portugal in 2015 and one of the most prominent since the start of the recent crisis'. The vendors are Catalunya Banc's Corporación Bética and Algarvetur and the sale is part of the divestment process carried out by Catalunya as part of its strategy to focus on retail banking. The Vilamoura resort spans in excess of 2,000 hectares around an 825-berth marina. The resort comprises of over 700,000 m2 of buildable land for the construction of hotels and over 5,000 apartments and houses.

Portugal is a popular destination for northern European holidaymakers and second-home buyers, but an influx of Asian – read Chinese - investors is now on the cards. Under a recently introduced programme, foreigners who invest over €500,000 in Portuguese real estate are offered residence in the country as well as foreigners who transfer €1 mln or more in capital or create at least 10 jobs. According to CBRE, this has resulted in nearly 2,000 so-called ‘golden visas’ being issued following property acquisitions over the past two years, nearly 1,500 of which have gone to Chinese investors.

Possibly even more remarkable is the wave of Asian capital targeting development, as signalled by Francisco Horta e Costa, managing director at CBRE in Portugal. 'The most interesting movement of the past 12 months is a rise in interest among Chinese developers which are looking to take advantage of the new regulation. They are interested in the development or redevelopment of residential projects in Lisbon, with the aim of marketing these projects among fellow citizens in their domestic market. Although they have not made a move yet, they are visiting several potential projects, and I truly believe something big will happen in the near future,' he said.

Horta e Costa noted that larger Chinese investors and developers including Dalian Wanda, Fosun, Country Garden and Poly Group have been scouting the market for development opportunities.

With so many formidable foreigners poised to pile into Portugal, potent√ial investors may be forgiven for lamenting that the country’s entire economy is no bigger than that of the city of London. Yield compression is already gathering pace. Over 2014 as whole prime yields on average (across all sectors and geographies) fell 114 basis points from 8.99% to 7.85%, according to David Hutchings, head of research at Cushman & Wakefield. This is the second sharpest fall in Europe after Ireland, he added. 'Obviously in core sectors yields fell further, with Lisbon offices down 150 bps, logistics 175 bps and shopping centres 125 bps.'

The economic lights may be turning to green, but Portugal’s small size condemns it to the status of a perhipheral country for investors. That is the cross it will always bear.

Judi Seebus
Editor in chief

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