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What The Distressed Real Estate In Portugal Means To You

08 Apr
Aerial cityscape of Lisbon, Portugal.

What The Distressed Real Estate In Portugal Means To You

The First Distressed Opportunities Will Hit The Market In Portugal Within The Next Two Months—Here’s Why

The current crisis will continue to impact residential demand in the coming months with minor price corrections expected.

The Portuguese economy’s widespread contraction has not yet spilled into the real estate market —partly due to government-subsidized credit, layoffs, and moratorium on mortgage repayments. The immediate financial effects of the COVID-19 pandemic are likely to extend past the summer, with its aftermath impacting the economy well into 2022.

The Residential Sector

Decreasing yields in the rental market will affect acquisition prices in the residential sector. With the Work From Home trend, we can also expect changes in the workplace that will further increase commercial properties’ supply in the coming months.

The Short-Term Rental Market

Price increases in Portuguese cities are historically linked to tourism—particularly to investment into properties for short-term rentals backed by the Airbnb phenomenon. Due to the lack of tourism now and in the foreseeable future, a considerable percentage of companies, particularly in the retail and hospitality sectors, will find it difficult to bounce back from the financial toll. Lockdowns will have a long-term impact on the economy, with many companies and families depending directly or indirectly on tourism.

However, as the pandemic takes its toll on employment levels, consumer confidence, and tourism flows, real estate prices have not yet been subject to correction due to several reasons. The good news for investors is that they will soon no longer apply and opportunities for good deals will present themselves in the coming months.

Why Haven’t The COVID-19 Impacts Have Been Felt Yet?

The negative impact of COVID-19 on rental prices has been curbed by the lack of new construction, low interest rates, moratoriums, and cash-strapped landlords. Residential construction in Portugal faces practical limits. Portuguese cities are hundreds or thousands of years old. In the past, zoning and heritage conservation laws did not allow for high-rises or new developments in numbers required to match ongoing demand. Due to the increase in demand in previous years, developers invested in new construction. Construction was seldom subject to lockdown rules during the pandemic. Therefore, slowly but surely, the supply of real estate has been increasing. The number of buildings completed in 2020 rose compared to previous years, creating inventory that can slowly and gradually force prices down.

Properties are on the market for more extended periods, a tendency backdating from late 2019 to early 2020. Sellers responded to the crisis with a “hold and endure” attitude. They had the backup of realtors who would not admit selling prices were lower, transactions were fewer, and inventory was increasing. The Emperor’s New Clothes comes to mind.

Finally, the main stop-loss factor is the moratorium. Until now, those who defaulted on rental payments could not be evicted, and those who failed mortgage payments were forced to sell their homes. The logic behind 2020’s moratorium system was to support families and businesses facing a short-term cash flow reduction.

Preparing for a successful desert crossing depends on correctly estimating how vast the desert is. It is safe to say that the estimates were optimistic.

Private moratoriums self-implemented by banks ended March 31. Other moratoriums granted by the government, with an impact on rental payments and mortgage repayments, will end in September 2021.

The Reality Of The Market

Businesses will face the new market overleveraged and will need restructuring. Families will need to refinance or dispose of assets.

The Portuguese government presented a Recovery and Resilience Plan to provide EU funds during post-pandemic times. However, conversations with bankers reveal that credit lines currently available to aid businesses are cheap but strict concerning indebtedness rates and revenue.

I believe, therefore, that the first distressed sales will reach the market in the next couple of months.

Meanwhile, expectations for the real estate market remain generally positive.

There is value in Portuguese real estate that will not be impacted by the end of moratoriums. However, prices, in the short term, will be.

João Gil Figueira