In May, Investment Property Databank released its annual performance figures for the Portuguese and Spanish property markets for 2003. At the end of 2003, the Portuguese and Spanish databanks comprised 399 and 346 properties respectively, valued at e5bn and e8bn. IPD estimates its coverage of the Portuguese and Spanish property markets at the end of 2003 to be 39% and 28% respectively.
Returns from the Imométrica/IPD Portuguese property Index declined for the second successive year in 2003, falling from 13.3% in 2002 to 9.5% in 2003. This dip in property returns, combined with the global upturn in equity markets, meant that property was the middle-performing asset in Portugal in 2003. After a poor year in 2002, equities rallied to achieve an annual return of 13.5% in 2003, while bonds saw returns halve to 4.4% in 2003.
The decline in Portuguese property returns came as the rate of increase in capital values halved from 5.7% in 2002 to 2.4% in 2003. The rate of rental value growth dipped a little to 2.1% in 2003 from 3.8% in 2002.
In Spain, returns from the IPD Spanish Property Index also showed a year-on-year decline, falling from 8.3% in 2002 to 7.9% in 2003. As with Portugal, property was the middle-performing asset in Spain in 2003. Equities recovered from a shocking 2002 to achieve an annual return of 28.2% in 2003, while bonds saw returns halve to 4.2% in 2003.
A tailing off in capital growth also caused the shallower dip in returns in Spain. The rate of increase of capital values declined from 2.4% in 2002 to 1.8% in 2003.
Figure 1 shows that while returns on the Spanish property market have closely matched those achieved in the French market over the past three years, Portuguese property returns have outperformed both these markets. This is largely due to the different composition of the databanks in each of the countries, with the retail sector accounting for a much higher proportion of the Portuguese databank.
Retail was the top-performing sector in both the Portuguese and Spanish markets in 2003, with returns of 11.6% and 10.4% respectively. As was also the case in 2002, retail returns dwarfed those on offices, which delivered returns of 5.3% and 5.5% in Portugal and Spain respectively in 2003. This divergence in performance came as retail capital values continued to rise steadily, whereas those on offices stalled or fell marginally.
Over the four years of the Portuguese databank, the retail sector has also been the top-performing sector, delivering returns of 14.8% a year, a little way clear of the 14.1% achieved by the residential/other sector. Industrial has lagged at 10.8% a year, with offices trailing at 7.8% a year. This variation in performance can be explained almost entirely by different trends in capital growth.
In Spain, residential has achieved superior returns over the past three years, at 11.6% a year, marginally ahead of retail returns, at 11.4% a year. As with Portugal, industrial trails in third, with offices adrift in fourth, delivering returns of 7.2% and 5.8% a year respectively. Again, this variation in performance is largely a function of capital growth, which has been especially strong in the residential sector, at 8% a year, compensating for weak income return, at just 3.6% a year.
Detailed data for 2003 show opposite performance trends in the Portuguese and Spanish office markets. While returns on Lisbon central business district offices, at 9.2%, were well ahead of regional returns, Madrid CBD offices were the weakest Spanish segment, delivering returns of just 0.1%. Echoing the trend in Spain, Paris CBD offices were the weakest segment in the French market, with returns of 5.6% in 2003.
Table 1 shows the composition of the Portuguese and Spanish databanks. While retail accounts for half the properties in the Portuguese databank and office about a third, the reverse is true in Spain, where offices make up half of the databank and retail about a third. With retail typically achieving double the returns of offices in each country over the past few years, the higher exposure to the retail sector of Portuguese investors explains why Portuguese all property returns have been higher than Spanish all property returns.
Dominic Smith is a senior researcher at Investment Property Databank (IPD). Email marketing@ipdindex.co.uk

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