The year 2003 will be remembered as one of negative economic growth and increasing unemployment. However, during the year, considerable structural reforms were carried out, rendering Portugal a more attractive investment location. The prognosis for 2004 and 2005 is one of gradual recovery with GDP expected to register positive growth and a further reduction in inflation, bringing Portugal significantly closer to the EU average. Unemployment is expected to stabilise in 2004 and trend downward by 2005.
In mid 2004, the European Football Championship (Euro 2004) will be a positive influence on the economy, bringing a significant influx of people and capital and raising the profile of the country on the international stage.

Property investment overviews
With a significant improvement in economic sentiment over recent months, a greater level of optimism is being seen in the property sector, and this is being reflected in activity on the ground. The investment market remains buoyant, fuelled by strong investor demand focussed on assets securely let to strong covenants, with particular interest in the retail sector. Identifying opportunities for investors is difficult and buyers continue to outweigh available supply. Strong competition amongst purchasers chasing similar stock is leading to aggressive yields for quality properties.
Retail property is the most sought-after sector at present, which bodes well as Portugal has some of Europe’s leading shopping centres and the retail park concept is gaining momentum. The lease structure (shop utilisation agreements), used in shopping centres and retail parks, provides comparatively longer and more secure leases than in either the office or logistics sectors. The development market is dominated by a few players (Sonae Imobiliaria, AM Developments, Mundicenter and Amorim), all of which either have develop and hold strategies or have established relationships with investors. Consequently, accessing stock is difficult. Investment opportunities will primarily be sub-regional and neighbourhood centres in secondary cities, retail parks, and potentially portfolio sale and leasebacks of hypermarkets and free-standing retail warehouse stores.
Strong investor demand is expected to continue in 2004, focussing again on securely let assets. This is an intensely competitive investment sector in Portugal, particularly in the sub €40m price bracket, as it is the favoured property asset amongst Portuguese property and pension funds. With the exception of select high calibre investment properties, there is limited scope for further yield improvement in 2004, and as such, capital values are expected to be flat, only improving as the rental market recovers in 2005.
Investment interest remains strong for modern, well-located stock offering strong covenants. However, there are few opportunities as much of Portugal’s industrial property is outdated and the development of new stock is dominated by a few players who typically have a long-term develop and hold strategy. Foreign investors so far have had limited participation in the Portuguese industrial investment market, in part due to the absence of opportunities of sufficient value (ie exceeding €10m) and to the modest standard of the buildings and supporting infrastructure.
The long-awaited tax reforms have finally become a reality, introducing a more equitable and balanced taxation. Various property-related taxes have been reduced, which is having a significant and positive impact on the real estate sector. The most significant change was the reduction in the real estate transfer tax (formerly known as ‘Sisa’ and now ‘IMT’), which was reduced from a hefty 10% to 6.5% of the purchase price.
Lease law reforms are on the political agenda, with the Government having stated its firm intention to change the law during 2004. This is recognised by all sectors in the economy as essential to boost the investment market and regenerate city centres.
What is publicly known about the government’s current thinking, is that, going forward, lease formats will be liberalised, with lease term and notice provisions freely negotiated between the parties. This would eliminate the infamous 90-day rolling notice period on the part of the tenant, as is presently the case under the ‘New Lease Law’. This will increase investors’ security of income stream and in turn result in a major increase of (particularly, foreign) investor interest in the Portuguese market.
Additionally, and retrospectively, the government is likely to propose an end to the tenant’s perpetual security of tenure, as is presently the case under the ‘Old Lease Law’, with a likely transition period rumoured to be between five and 15 years. This element of the lease reform will have major social consequences, as tenants (of both residential and commercial real estate) paying currently nominal, low rents will eventually have to pay rental levels close or at market level.
The Portuguese government recently proposed legislative changes that are affecting both medium to large scale retail and retail development, with all stores over 500 sqm, or those part of a group operating more than 5,000 sqm nationwide, plus any retail development of over 6,000 sqm, now subject to a commercial licence. The immediate effect is likely to be stagnation in the pace of store openings and new development while operators come to grips with the intricacies of the new legislation.
Matthew Walker is a partner, Investment Services, at Cushman & Wakefield Healey & Baker in Portugal

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