Portugal’s real estate sector is in a much better shape to deal with the short-term effects of the Coronavirus crisis according to an online conference organised by the Portuguese Association of Real Estate Investors and Developers and magazine Vida Imobiliária.
The online teleconference ‘The Real Estate Sector and Covid-19’, which counted on over 1000 participants and an impressive lineup of industry speakers, found that while the current epidemic might drive down house prices in the residential sector in the short-term, the effects would be of a short duration with the market getting back to normal within 10 weeks at most.
It was agreed that Portugal’s real estate sector, despite still being heavily reliant on both tourism and overseas investors and investment, was better prepared, more professional and had modernised to meet the challenges of the digital economy.
Vanguard Properties MD, José Carlos Botelho, said that both developers and real estate professionals were “very different” in the way they operated during the great financial crisis of 2008-2014 while Portugal’s banking sector was much more careful when it came to granting credit for mortgages and developments.” “I have much more confidence today than I had in 2008” he said.
Botelho said that Vanguard was in a “premium segment” of the Portuguese real estate market and in the current time of uncertainty was “well placed” because it had a “direct sales team” rather than relying on estate agents which had helped the developer cut costs.
However, the MD of Vanguard Properties admitted that some clients from Asia had cancelled their reservations on properties, while some European clients had put off signing their intention to buy contracts. “We are confident that we will resolve the situation”.
António Gil Machado, publisher of magazine Vida Imobiliária, said in his opening remarks that the boom in tourism and startling recovery in Portugal’s real estate sector from 2014 onwards showed there was a “clear link between a buoyant tourism market and real estate projects and house sales”.
This was particularly true of Lisbon, Porto and Faro where average residential house prices had doubled since before the crisis, although this had been less evident in Portugal’s other cities. Machado expressed the fear that the current crisis might force lower property yields but reminded the audience that “cash is king” and that certainly new opportunities would arise from the new crisis.
The Executive Vice President of the APPII, Hugo Santos Ferreira, said that the real estate sector, and indeed the whole of Portugal, was going through an “exceptional and unique moment” but it was important to get things into perspective and avoid being alarmist.
“We have been keeping in constant contact with our overseas investors and are maintaining a line of cautious optimism, even though the situation is worrying now for the short term with all the attendant negative impacts, but I believe that by the end of the year the sector will have recovered” he said.
Banks better placed
Millennium bcp’s property director José Araújo said that Portugal’s banks were “better prepared” to deal with shocks and crises, whether economic ones or crises such as the one now caused by the current Covid-19 virus. The head of the bank’s property department said that banks were less exposed and better capitalised than they were 10 years ago, largely because they had offloaded Non-Performing Loans and toxic assets from their balance sheets. He also expressed the expectation and hope that the current crisis would only last two-three months with a quick recovery.
Pedro Vicente, President of Habitat Invest said the virus provided a “time of reflection” and although he was worried, his company was focused on the recovery that would come and the opportunities that could be grasped. “With patience and calm we will get over this inconvenience and are preparing for the recovery” he said.
However, Vicente stressed that although companies in the sector were better prepared than during the last crisis, the scenario overwhelmingly depended on international investors since Portuguese entities and banks were still undercapitalised which risked putting Portugal in a fragile situation since Covid-19 was precisely putting that International investment at risk.
Ricardo Sousa, CEO of estate agency Century 21 said that it had begun the year with some caution even though February had proved to be its best month ever, however he admitted that house viewings had been suspended temporarily and they had witnessed a slow down in house purchases from international buyers as the crisis took hold, but stressed that purchases had been “delayed and not cancelled”.
“This (crisis) is temporary, well identified and under control, it will last 2-3 months and the effects on the economy will be less than those we saw in 2008. We continue despite everything and we have not suffered cancellations” (of contracts) while there had been a “sustained interest in visits” to the company’s site.
Falling property prices?
One of the concerns most raised by the 1000 or so online audience participants was the risk of a fall in house prices driven by a fall in demand caused by the Coronavirus. In a quick poll from participants 2% thought there would be no impact on prices, 41% thought there would be a moderate impact and 55% believed that the epidemic would result in house prices being driven down.
José Araújo of Millennium bcp’s Specialised Credit department said that both the Bank of Portugal and European Central Bank had support mechanisms in place to help sectors overcome the fallout from the crisis, but said: “what I can see is a fall in prices but also new opportunities as a consequence and it is inevitable that people with high levels of capital will benefit and do good business.”
The CEO of Century 21, Ricardo Sousa said he believed the Coronavirus pandemic would create a level playing field in the market whereby the owners would not wield so much power which would shift to the buyers who would have greater opportunities which in turn would boost the second-hand housing market.
Covid-19, Tourism and Property
There can be no doubt that both the real estate markets and property markets represent two of the fundamental mainstays of Portugal’s economy and, as such, are intrinsically interlinked. But with countries off limits, flights cancelled, tourism bookings down and planes being turned around in mid-flight – as happened with flights from the UK to Spain over the weekend – the short-term picture looks bleak.
Hugo Santos Ferreira of the APPII says the impact is inevitable since a large slice of Portugal’s property business is linked to tourism in one form of another — hotels, apart-hotels, resorts, holiday homes and Air BnB style local accommodation or guest houses.
He said that the situation for guest house and AirBnB owners operating in the local accommodation segment was “dramatic” with “sharp falls” in tourists and admitted that the hotel and apart-hotel segments would be worst affected. Indeed, “Everything that involves tourism and residential investment, both at a national and international level” has been hit hard.
A shift towards rental?
The dramatic falloff in tourism numbers has and will, without a doubt, cause serious problems for small hotels, guest houses, Air BnB establishments and B&B establishments as a whole which do not have the financial clout that the large international four and five star hotel chains in Portugal have to withstand the Coronavirus crisis.
But while many unprofessional and poorly run and poorly regulated bed and breakfast establishments may be pushed out of the market, there are opportunities for larger, more flexible and resilient establishments to turn to the rental market at a time when there is a marked lack of accommodation for the middle classes in Lisbon.
In fact the reconversion of some properties into long-contract rental establishments that had been used as guest houses has already been verified in the market, albeit only slightly.
Ricardo Sousa of Century 21 said that since last year that have been more properties returning to the rental market .
“In Local Accommodation either you have the scale to reduce maintenance costs with various properties or renting out to tourists has become no longer profitable for those who have just one or two properties and with the fall in tourist numbers over the past weeks this move towards rental has actually sped up,” he said.
Pedro Vicente (Habitat Invest) says there is a Local Accommodation ‘fringe’ which is not professional and whereby B&Bs are being operated as family businesses.
“These properties (in some cases rooms to let) will move over to the rental market which is why sector operators are asking the Government to take measures to soften the effects of the epidemic on the real estate sector in addition to the €200 million credit line already announced by the Government of António Costa.
José Araújo of Millennium bcp said, “Anything that can help people in the sector who have seen their income dry up is welcome if this help is rolled out across the board. The social question not only affects tenants but also landlords”.
VAT at 6%?
One of the main calls to the Government over the past 12 months or more is the introduction of a lower VAT rate to 6% for the construction sector which in Portugal has been particularly hard hit from the Coronavirus and the collapse of the economy in Angola which left companies owed tens of millions.
José Carlos Botelho believes that by lowering the VAT rate on the construction industry, developers and builders would be encouraged to invest in housing projects at a time when lack of skilled manpower and the high cost of building materials has made it almost impossible for developers to invest in middle class affordable housing and make a profit.
“This measure should be applied to property refurbishment and renovation but also new build and the Government needs to reduce planning permission times which have got worse in some municipal councils” said the MD of Vanguard.
But Hugo Santos Ferreira went further calling on a raft of measures including IMI property tax exemptions until the end of the year, IRC tax exemption to July and a streamlining of local council procedures and credit lines to struggling companies, among others.