The. Handbook. All you need to know about Investing in Portugal. Second Edition

Transcription

1 The Property Handbook All you need to know about Investing in Portugal Second Edition

2 Table of Contents Topic Introduction Page

3 introduction Economic recovery In recent years Portugal has probably overcome the most difficult task a country can encounter: the need to recover its international credibility. Following many years of a credit-fuelled expansion of the non-tradable sector and declining export performance, the financial crisis triggered a severe recession and forced national authorities to implement a comprehensive structural reform agenda, which is consequently helping to rebalance the economy towards a thriving export sector. Indeed our agenda has been successful due to the fact that its foundations were established on three main pillars: 1) Fiscal Consolidation, by strengthening the macroeconomic financial stability, 2) a Structural Adjustment, on path towards sustainable growth and 3) the Stabilization of the Financial Sector, by restoring confidence in the financial market. Step by step, the Portuguese economy is showing signs of recovery even beating some guesstimates - and, as a whole, will benefit from the current upward trend. Solid foundations for investment attractiveness Portugal has smoothly overcome the external financial assistance program and preemptively created conditions to foster competitiveness and investment. Among such measures, I would like to highlight: I. The corporate tax reform, which aims the reduction of the corporate tax rate, from 31,5%, in 2013, to 17% in 2018 (currently 21%), and introduced a participation exemption regime for shareholders whose shareholding position exceeds 5%, while also simplifying the taxation system and burden for smaller businesses; II. The new tax code for investment, has risen fiscal benefits and introduced a zero corporate tax rate for startups; III. The creation of a Development Bank specially aimed to address market failures in financing SMEs; IV. The full reorganization of the Justice System, including a new code of civil procedure designed to reduce court backlogs, and speed up the resolution of standard civil and commercial disputes; V. Reforms in the product market, by eliminating excessive restrictions, red tape costs and bureaucratic barriers to economic activity, ensuring that entry and exit costs are kept as low as possible. Bottom line, the Government s long time objective is to guarantee a sustainable economic GDP growth (greater than 2,2% in 2020), by facilitating investment, stabilizing domestic demand and by promoting the expansion of Portuguese companies to foreign markets. An effort whose consequence has been acknowledged by the main international rankings, namely: Doing Business (25th); Global Competitiveness Report (31st); OCDE Overall Regulation Report (11th) and Forbes - Best Countries to do Business (20th). 3 The Property Handbook

4 The Portuguese property market If fostering investment is a main priority, the investment in property market is not an exception. In late 2014, new tax rules, concerning the taxation of investment funds operating in Portugal, have been approved. In line with the best international practices, gains are now taxed as a whole on exit and at the shareholders personal level, rather than autonomously whilst inside the fund. This represents a significant change that boosts the competitiveness and the interest of products offered by traditional Real Estate investment funds operating in Portugal. Additionally, the 2015 State Budget has conferred legislative power to the Government to set-up and regulate a regime for the Sociedades de Investimento em Património Imobiliário (SIPI), i.e., the equivalent of the Real Estate Investment Trust. The intention of this legislative power is to foster the real estate market by: i.) defining the conditions and procedures that qualify a company as a SIPI; ii.) establish the rules that regulate its activity and the application of the regime; iii.) determine the consequences inherent to the loss of SIPI classification; and iv.) regulate a fiscal optional regime, structured upon a general principle of fiscal neutrality and, in line with the above mentioned new tax rules for investment funds, avoid double taxation. In addition, several exemptions regarding the Municipal Property Tax (IMI) have been introduced, namely for properties located in business activity zones, and new legal environments have been established, namely regarding Local Housing Rental and the competitiveness of Commerce, Service and Food and Beverage sectors, easing the establishment of new commercial activities by significantly reducing red tape costs while simplifying administrative processes. All together, and combined with the possibility of obtaining a Golden Visa, for investments in real estate above 500 thousand euros, such measures will definitely continue to and further foster the property market in Portugal and increase the interest of local and foreign investors in Portuguese real estate. All said and done, I truly believe and extend my invitation that now is the time to invest in Portugal! Leonardo Mathias Secretary of State of Economy 4 The Property Handbook

5 at a glance Introduction Property at a Glance Office Retail Warehouse and Logistics Total Stock (Q4 2014): 4.56 million sq m Gross Take-up 2014: 126,500 sq m Average Gross Take-Up ( ): 136,000 sq m CBD Prime Rent (Q4 2014): 18.5 / sq m/ month Lisbon Vacancy Rate (Q4 2014): 12% Total Stock in Retail Schemes (Q4 2014): 3.6 million sq m Total Stock in Shopping Centres (Q4 2014): 2.8 million sq m Prime High Street Retail Locations In Lisbon: Av. Liberdade and Chiado Prime High Street Locations In Porto: Clérigos and Rua de Santa Catarina Shopping Centre Prime Rent (Q4 2014): 85 / sq m/ month High Street Prime Rent (Q4 2014): 90 / sq m/ month Gross Take-up 2014: 150,000 sq m Average Gross Take-Up ( ): 166,500 sq m Prime Rent for Logistics (Q4 2014): 3.25 / sq m/ month 5 The Property Handbook Investment Annual Investment Turnover 2014: 850 million Average Annual Investment Turnover ( ): 660 million Office Gross Prime Yield (Q4 2014): 6.25% Shopping Centre Net Prime Yield (Q4 2014): 6.50% High Street Gross Prime Yield (Q4 2014): 6.00% Industrial & Logistics Gross Prime Yield (Q4 2014): 8.00% Hotel Beds Supply Annual Average Growth (2005-july 2014): 1.8% Overnight Stays Annual Average Growth ( ): 2.4% Overnight Stays (2014): 44 million Occupancy Rate (2014): 58.8% Residential Number of homes/ Number of households: 1.4 Highest number of new houses concluded in a year: 126,000 (in 2002) Lowest number of new houses concluded in a year: 21,000 (in 2013) Housing Price Change 2014/2013: 5% Average Sales Price of New Homes in Lisbon: 2,800 / sq m Average Sales Price of New Homes in Porto: 1,800 / sq m

6 Legal at a Glance Ownership Lease Real Estate Transactions Urban Renovation Ownership right is the broadest and strongest title over real estate in Portugal. It grants its titleholder full and exclusive rights of use, fruition, and disposal of real estate, unlimited in time, within the limits of the law (comparable to freehold title in common law systems); Portuguese legislation establishes other forms of property tenancy such as horizontal property, surface rights, etc. The most commonly used contractual arrangements for offices, logistics and high-street retail segments are standard leases executed under the Portuguese urban lease law ( standard commercial leases ). The urban lease law is quite flexible, allowing the parties to freely stipulate the main terms and conditions of the lease (such as duration, renewal, termination options, rent review, cost allocation, etc.). The lease of retail units in shopping centers, retail parks and other similar commercial schemes is normally carried out through shopping center leases. These leases are considered as contractual arrangements not regulated by any specific legal framework, and therefore are not subject to the legal framework of the urban lease law, but only subject to the general legal framework applicable to contracts. These agreements tend to follow market standards of the specific segment in question. Direct transfer of rights over real property in Portugal (asset deal) is done either by means of a public deed, or a private document certified by a notary, a Land Registry Office or a lawyer (the most commonly used form is the public deed). The transfer of title must be registered at the Land Registry office within 30 days of the transaction. Portuguese Land Registry offices are public record offices which register information on the legal status of real estate (description of the property, ownership, charges, mortgages, encumbrances and/or other rights in rem). Indirect transfer of real property, through the transfer of shares of a Portuguese company owning the property (share deal), is made by means of a private document entered into by the relevant parties, which does not need to be notarized. The acquisition of an interest in a Portuguese company may be subject to further formalities, such as communications to the company and to public authorities and, in case of acquisition of interest in a quota company (a specific type of limited liability company available in Portugal), registration with the Portuguese Companies Registry. Recent legislative changes to the urban renovation regime made administrative procedures related with urban renovation more simple and straightforward Recent legislative changes to the law on works on leased buildings also made lease agreement termination (in case of deep renovation works) more simple and straightforward. Differently from what happened in the past, urban renovation activities are currently more dependent on the initiative of private developers and less dependent on the initiative of the municipalities and other public entities. The activity of urban renovation benefits from several relevant tax advantages and incentives. 6 The Property Handbook

7 Legal at a Glance Foreign Investment Golden Visa Programe Non Habitual Residents Tax Real Estate Financing There are no restrictions on foreign investment in Portugal. However, among other formalities, foreign investors must obtain a Portuguese tax identification number and, foreign investors with tax residence outside the EU must appoint a Portuguese tax resident (individual or legal entity) as their legal representative before the Portuguese tax authorities. The Golden Visa program allows the granting of a temporary residence permit for third-country nationals that intend to invest in Portugal, notably through the acquisition of real estate assets with a minimum price value of 500,000. The granting of this temporary residence permit allows for free travelling within Schengen Space and for family reunification. Any third-country nationals holding a temporary residence permit in Portugal for at least 5 years (including Golden Visa) may apply for a permanent residence permit (provided that certain circumstances are met). Any third-country nationals legally resident in Portugal for at least 6 years (including Golden Visa) may apply for Portuguese citizenship/passport (provided that certain circumstances are met). Qualifying for the regime requires (i) being a Portuguese resident taxpayer under the Portuguese domestic rules; and (ii) not having been taxed as a Portuguese resident taxpayer in the five years prior to taking up residence in Portugal. If qualifying and duly registered as a NHR with the Portuguese Tax Authorities - Portuguese-sourced income: employment (category A) and self-employment (category B) income derived from specific high value added activities is subject to tax at a 20% flat rate (added in 2015 by the 3.5% extraordinary surtax); and - Foreign-sourced income may be exempt of taxation under certain circumstances and the rules provide for differences depending on the type of income. Real estate financing in Portugal is usually secured against the property assets and/or the shares of the property owning company and/or property generated income. Mortgages are the most common securities provided in real estate transactions in Portugal. They consist of a right in rem that grants to the creditor, in case of breach, the right to be paid by the value of the property, with priority in relation to other creditors (provided other creditors do not benefit from special privileges, such as it would be case, for example, of the social security). Pledges over shares and pledges over receivables are commonly used in Portugal. 7 The Property Handbook

8 Tax at a Glance Asset Deal Acquisition of real estate IMT (Property Transfer Tax) General regime rates (levied on the acquisition value or the taxable value of the property, if higher): URBAN PROPERTIES: Residential purposes: from 0% to 6%. Other (including comercial property): 6.5%. RURAL PROPERTIES: 5% Transfer of properties to entities resident in tax havens: 10%. Property holding Stamp Duty IMI (Municipal Property Tax) 0.8% (levied on the acquisition value or the taxable value of the property, if higher); stamp duty is excluded in case VAT exemption is waived. General regime rates (levied on the taxable value of the property): 0.3% to 0.5% (urban properties) 0.8% (rural properties). Properties owned by entities resident in tax havens: 7.5% Stamp Duty 1% levied on the taxable value of the property when equal or higher than 1,000,000 and allocated to residential use (except for properties owned by entities resident in tax havens, where the applicable rate will be 7.5% on all properties regardless of its use). Property Income IRC (Corporate Income Tax - CIT) PORTUGUESE COMPANY : Property income is included in the global taxable income for taxation purposes (please refer to Profits below). Subject to withholding at the rate of 25% (companies whose statutory scope of business includes the management of owned properties are not subject to withholding). FOREIGN INVESTOR: Property income is subject to withholding at the rate of 25% on the gross amount of the lease income (only maintenance and repair expenses, plus IMI payments, are deductible). Sale of real estate Capital gains PORTUGUESE COMPANY: Capital gains are subject to CIT and are included in the global taxable income (please refer to profits in the next page). In case of reinvestment, taxation may be limited to 50% of the capital gain. FOREIGN INVESTOR: Capital gains are subject to CIT at 25%. 8 The Property Handbook

9 Tax at a Glance Share Deal Acquisition of shares IMT/Other taxes No taxation provided the target company is a joint stock company (sociedade anónima). If the target company is a quota company and an interest of 75% or more is acquired, IMT will be levied on the transaction by reference to the percentage of share capital acquired, on the value of the property in proportion to the book value of the total assets of the company. Activity Profits CIT: 21% Municipal surtax: 0% to 1,5% (levied on the taxable profits before the deduction of tax losses carried forward from previous years). State surtax (levied on the taxable profits before the deduction of tax losses carried forward from previous years): 3% from 1,500,000 to 7,500,000 5% in what exceeds 7,500,000 to 35,000,000 7% in what exceeds 35,000,000 Dividends Portuguese company: 0% (if certain conditions are met) or general CIT regime Foreign investor: 0% (if certain conditions are met) or 25% (with a possible reduction to a rate of between 5% to 15% under the relevant Tax Treaty where applicable). Sale of shares Capital gains Portuguese company: 0% (if certain conditions are met) or general CIT regime Foreign investor: 0% (if no taxation is due under the relevant Tax Treaty) or 25% (notably if at least 50% of the company s assets are comprised of property assets). 9 The Property Handbook

10 1. MACROECONOMIC PICTURE After 2.7% Gross Domestic Product (GDP) average growth in the last decade of the millennium ( ), 2000 was the last year with an economic growth higher than this average. Since then, Portugal has witnessed a stagnation period with several recession years: 2003, 2009 and 2011 to In 2009 the country started showing signs of recession which obliged the government to introduce several austerity measures. After a mild recovery in 2010 the economy went back to recession towards the end of the year. In May 2011, a 3 year Economic Adjustment Programme was agreed with the European Commission, the European Bank and the International Monetary Fund ( troika ), with the goal to repair the country s damaged public finances and boost the weak competitiveness. Several austerity measures were introduced during this period, including higher taxes and significant cuts in wages. The 78 billion euro bailout plan ended in mid-2014 and the government decided not to apply for a precautionary credit line. Portugal has begun to show signs of economic recovery in 2013 and in 2014, the country already recorded a growth, of 0.9% according to Bank of Portugal estimates. For the subsequent couple of years, acceleration to 1.5% in 2015 and 1.6% in 2016 is expected. The forecasted recovery of the economic activity reflects the acceleration in domestic demand and the maintenance of a strong growth in exports. The unemployment rate observed a strong decrease, from 17.4% in early 2013 to 13.3% in January In the decade the Consumer Price Index (CPI) has been around 2.4% on average with deflation of 0.9% in Despite the troika program ( ), which imposed deep cuts and the contraction on internal demand, annual inflation was relatively high in 2011 and 2012 due to tax increases (mainly VAT). Only in 2013 prices started to slow down and monthly negative changes were observed. In 2014, the annual average rate of CPI was -0.2%, mainly due to the negative contribution of unprocessed foods and energy products. MACROECONOMIC INDICATORS In the period of strong financial austerity and high unemployment rate, from 2011 to 2013, private consumption had an accumulated contraction of 10.3%. However, in 2014 an increase of 2.2% was observed. Indicator (e) 2015 (f) 2016 (f) GDP 0.7 % -1.4 % 0.9 % 1.5 % 1.6 % Consumption 1.3 % -1.7 % 2.2 % 2.1% 1.3% Unemployment 7.3 % 16.2 % 13.9 % 13.0 % 12.6 % Consumer Prices 2.4 % 0.4 % -0.2 % 0.7% 1.0 % Source: Bank of Portugal and Oxford Economics. 10 The Property Handbook

11 2. TERRITORIAL DIVISION AND DEMOGRAPHICS Portugal is made up of the mainland and the archipelagos of Madeira and Azores located in the Atlantic Ocean. Portuguese territory comprises 9.2 million ha and is administratively divided into 18 districts and the two autonomous regions of Madeira and Azores, which together integrate 308 councils. The councils are subdivided into parishes ( freguesias ). In 2013, after an administrative restructure the number of parishes has decreased, to the current 3,092. Statistically Portugal is divided in 7 different regions: North, Centre, Lisbon, Alentejo and Algarve, in the mainland, as well as Madeira Autonomous Region and Azores Autonomous Region. These are then subdivided in 30 sub-regions. According to the last census carried out in 2011, Portugal had 10.5 million inhabitants reflecting a 1.4% demographic growth in that decade. However 2015 projections point now to only million inhabitants, a decrease that results mainly from increased emigration and the sharp decline in birth rate. The Greater Lisbon sub-region concentrates circa one fifth of the Portuguese population with 2 million inhabitants, while 1.3 million people live in the Greater Porto sub-region. The most populated councils are Lisbon, Sintra and Vila Nova de Gaia. Population by Portuguese districts Região Autónoma dos Açores Região Autónoma da Madeira Lisbon Leiria Viana do Castelo Braga Porto Aveiro Coimbra Santarém Setúbal Viseu Vila Real Castelo Branco Portalegre Évora Guarda Bragança Beja Algarve Population per District < 200, , , ,000 1,000,000 > 1,000,000 Source: CBRE/INE 11 The Property Handbook

12 3. COMMERCIAL PROPERTY MARKET SNAPSHOT 3.1 LISBON OFFICE MARKET The Lisbon office stock is concentrated in 6 welldefined zones, the locations of which are indicated on the map. The main zones make up the CBD (Central Business District) and are located in the city centre, while the Western Corridor is the only zone located on the periphery of Lisbon. Any high quality office buildings situated in the city of Lisbon, but outside the defined zones, are integrated in a wider area called Other Zones. The gross office take-up in Lisbon varied significantly in the last 10 years between a maximum of 233,000 sq m in 2008 and a minimum of 78,000 sq m in In fact two periods can be distinguished: the strong pre-crisis period, with high take-up and an annual average of 180,000 sq m; and the weak period, with very low occupational levels, of circa 100,000 sq m per year, on average. LISBON OFFICE ZONES A recovery started to be observed in 2014 with a 127,000 sq m annual gross take-up and a year-on-year increase of 63%. This was the GROSS OFFICE TAKE-UP EVOLUTION IN LISBON sq m 250, , , ,000 50,000 0 Avg ~ 180,000 sq m highest take-up in Lisbon since 2008 although still far below the annual average registered in the pre-crisis years. Avg ~ 100,000 sq m Source: CBRE/LPI 6 3 Praça de Espanha Ma rquês de Pombal Amoreiras Rato Estrela Lapa 2 4 Aeroporto de Lisboa Alvalade Campo Pequeno Praça do Areeiro Olaias Saldanha Estefânia 1 Baixa Chiado 5 Parque das Naçõe s Amoreira s Rato 3 Praça de Espanha Marquês de Pombal Estrela Lapa 2 4 Alvalade 1 Campo Pequeno Praça do Areeiro Olaias Saldanha Estefânia Baixa Chiado Restelo Alcântara 12 The Property Handbook Belém 1. CBD 1 2. CBD 2 3. Expansion Area 4. Historic Center 5. Parque das Nações 6. Western Corridor

13 OFFICE STOCK ADDITION The level of take-up in 2008 was considerably influenced by the largest lease transaction registered in Portugal. This involved the concentration of several Ministry of Justice entities within a new building complex, situated at Parque das Nações and comprising a total area of 62,000 sq m. The Lisbon office stock is currently in the region of 4.6 million sq m, with a strong increase, of 632,000 sq m between 2003 and 2011, which results in an annual average of approximately 70,000 sq m. Only from 2012 onwards, did the economic and financial crisis start to impact the development pipeline, with a significant slowdown in the completion of new office buildings. In 2014 only two buildings were added to the stock and are already fully occupied. There are currently four office buildings under construction and expected to be concluded during 2015, of which only one, with 4,000 sq, is a speculative development. All the others are owner-occupied or already pre-let, which means that new product in the market is scarce. Parque das Nações, a zone which emerged at the end of the 90 s and has been developed over the last decade and a half, concentrated the highest area of new office space in the last 10 years, with 33% of the total new supply. This is followed by the Western Corridor, with a 27% share. However, recent developments and the ones currently on pipeline are concentrated in the CBD zones 46% of total new stock projected from 2012 to The overall vacancy rate in Lisbon has oscillated between minimums in the region of 7% in 2007 and 2008, and maximums of around 13% in 2004, 2005 and again in 2013 and The vacancy rate remained stabilized, at around 13%, during 2013 and most of 2014, after gradual increases since Only in the end of 2014 the vacancy rate showed a decrease to close to 12%. The Western Corridor registers the highest vacancy rates, followed by the Expansion Area. In two years and a half the vacancy rate in Parque das Nações dropped for a half, from 17% in the second quarter of 2012 to 8% by the end of sq m 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, (f) CBD 1 CBD 2 Expansion Area Historic Center Parque das Nações Western Corridor Other Zones 13 The Property Handbook Source: CBRE/LPI

14 VACANCY RATE In the CBD the average vacancy rate in the past 5 years has been stable around 9%. As a result of the economic deceleration, since 2007, drops of more than 10% were registered in prime rental values in all zones, with the highest falls in Parque das Nações and Western Corridor, where the vacancy rate was higher. Nevertheless, prime rental values have been now stable for more than one year. In 2008 the Historic Centre recorded a significant increase in rent values with the refurbishment of a number of buildings into offices and the consequent increase in demand in the Chiado sub-zone, considered to be one of the most attractive areas of the city. The limited oscillation in the prime rental value of CBD1 (only 10% from the peak) has been ascertained, by an increased flexibility demonstrated by landlords, to offer rent-free periods and to participate in costs associated to fit-out works. An increase in prime rental values is expected to start to be observed in 2015 in zones where supply is declining. % of vacant space 30% 25% 20% 15% 10% 5% Source: CBRE 0% Q Q Q Q Q Q Q Q Q CBD 1 CBD 2 Expansion Area Historic Centre Parque das Nações Western Corridor Q Q LISBON PRIME RENTS / sq m / month 22,00 20,00 18,00 16,00 14,00 12,00 10,00 Source: CBRE 8,00 Q Q Q Q Q Q Q Q Q Q Q The Property Handbook CBD 1 CBD 2 Expansion Area Historic Centre Parque das Nações Western Corridor

15 3.2 RETAIL MARKET IN PORTUGAL From the beginning of the century, the retail market in Portugal has diversified, both in terms of format, as well as in geographic distribution. There is presently a total of approximately 3.5 million sq m of space located in retail schemes in Portugal, including shopping centres, retail parks, outlets and department stores. The retail market is currently a mature and consolidated sector, with saturated supply in some locations. This situation, together with the economic and financial crisis has forced a number of developers and owners to adapt, leading to the adjustment and repositioning of some schemes but also to high vacancy rates. In average terms, between 2001 and 2009 around 253,000 sq m/year of retail area was completed. In 2010 there was a significant drop in new openings with the inauguration of only 77,000 sq m, and although there was an increase Retail Stock Addition sq m 400, , , , , , ,000 in this value in 2011, with the completion of 104,000 sq m, this was still well below the average value. There were no openings in 2012 and 2013 and in 2014 only Alegro Setubal was inaugurated after the expansion, renovation and rebranding of the former shopping centre. Shopping centres are the main retail attraction in Portugal. Between 2004 and 2014, shopping centre area almost doubled, with the opening of 124 schemes, presently standing at a total of 2.8 million sq m. Colombo and Vasco da Gama in Lisbon, and NorteShopping in Porto, are considered the best shopping centres in Portugal. The retail park format expanded particularly during the period between 2004 and There are currently 36 schemes of this type in Portugal, dispersed throughout the entire country, occupying a total area of 450,000 sq m. The main occupiers of this retail format are large sized DIY, electronic and white goods as well as household goods retailers. Although the shopping centre is the dominant retail concept in Portugal, there are several high street locations and zones in Lisbon and Porto that strongly attract international operators and consumers. In Lisbon, the main retail areas are Avenida da Liberdade and Chiado, and in Porto the Clérigos and Rua de Santa Catarina. However, the supply of quality space in these areas is very limited, and consequently the value of the space that becomes available, namely in Lisbon, is significantly high. Despite the crisis, the rise in tourism, and particularly in tourists with high purchasing power, sustained the positive performance of high street retail in Lisbon s prime zones, steadily driving demand and the opening of several 50, Source: CBRE 15 The Property Handbook Shopping Centres Retail Parks Outlets Other Formats

16 shops in these areas, including the entry into Portugal of prestigious international brands. This strong dynamic led to prime rental values increase in early 2013, during the height of the crisis, and being stable since then. However, in the majority of retail schemes and in the retail units located outside the principal zones, there has been a steady downward PRIME RENTS PER RETAIL FORMAT Format Shopping Centre Lisbon pressure on rents, with an increase in the turnover only rent in shopping centres and the reduction, or even disappearance, of key money. Shopping centres started to show positive signs in The indexes of consumer and retail confidence are recovering and a slight improvement of sales was noted in prime and second prime shopping centres. However, secondary shopping centres continue to struggle Typical GLA (sq m) 100 Prime Rent ( / sq m/month) Y-o-Y Change (%) due to strong competition, weak footfall and low purchasing capacity in their respective catchment areas. Difficulties in obtaining bank financing for construction combined with an already saturated shopping centre market means that new projects will be limited, with only a small number of new shopping centres being expected to open in the next few years. Change From Peak (%) Shopping Centre Porto NA Retail Park 1, Outlet High Street Retail Lisbon High Street Retail Porto Source: CBRE, December The Property Handbook

17 3.3. Lisbon Warehouse and Logistics 3.3 LISBON WAREHOUSE AND LOGISTICS MARKET The Lisbon warehouse and logistics sector is distributed into 6 zones, as identified on the map on the next page. The more central zones, namely Lisbon City (Zone 4), Sintra-Cascais (Zone 3) and Loures-Vialonga (Zone 2) are characterised by the supply of smaller sized warehouses and frequently of mixed-use. The second ring includes the Alverca Vila Franca de Xira axis (Zone 1.A) as well as the zones south of the Tagus River, Montijo-Alcochete (Zone 5) and Palmela-Setúbal (Zone 6), with supply comprising medium sized warehouses. The Carregado-Azambuja axis (Zone 1.B) is further away from the city and concentrates the largest warehouses (> 10,000 sq m), occupied by the principal logistics operators and food chain suppliers. This is the least mature market of the three main commercial property sectors in Portugal, and therefore with less information available. Notwithstanding, the sector has developed substantially, both in terms of supply and demand, at the request of logistics operators and the major national food distribution players. According to the information collected by CBRE over the last 9 years, the gross take-up level of warehouse and logistics space oscillated between a maximum of 225,000 sq m in 2009 and a minimum of 120,000 sq m in 2012, with an annual average of 166,500 sq m. Despite the economic and financial crisis, take up has remained relatively high due to some important deals in the food distribution and logistics sectors. From 2004 to 2006 more than 70% of developed area was speculative construction. From then on, although there was some speculative development, the majority were logistics built-to-suit schemes. This at LogPlace Azambuja (75,000 sq m), Sonae at EcoPark Azambuja (107,000 sq m) and Decathlon in Setúbal (31,500 sq m), constructed in 2007, 2009, 2010/2011 and 2012 respectively, which contributed significantly towards the take-up levels recorded during those years. From 2012 onwards, the new supply of warehouse and logistics spaces was driven only by built-to-suit schemes. is the case of the logistics platforms of Logista at Passil Logistics Park (40,000 sq m), FCC Logística/ Aitena at LogPlace Azambuja (75,000 sq m), Sonae at EcoPark Azambuja (107,000 sq m) and Decathlon in Setúbal (31,500 sq m), constructed in 2007, 2009, 2010/2011 and 2012 respectively, which contributed significantly towards the take-up levels recorded during those years. From 2012 onwards, the new supply of warehouse and logistics spaces was driven only by built-to-suit schemes. As in the other property classes, the prime rents in the warehouse and logistics sector have suffered a downward trend with values falling in all zones. In the prime logistics zone of Carregado- Azambuja, prime rents have decreased by 7% from the peak in However prime rents have remained stable in all zones over LISBON WAREHOUSE AND LOGISTICS ZONES Vila Nova da Rainha Carregado Azambuja 1B 1A. Alverca - Vila Franca de Xira 1B. Carregado - Azambuja 2. Loures - Vialonga 3. Sintra - Cascais 4. Lisbon City Arruda Bucelas dos Vinhos Benavente VF Xira Venda Samora do Pinheiro Porto Correia Bucelas 1A Alto 2 Alverca Vialonga Pêro Pinheiro Terrugem Póvoa de Loures Sto. Adrião Sintra Bobadela Odivelas Famões Sacavém Prior Velho 5 Alvalade Alcochete 3 4 Alcântara Montijo Almada Barreiro Poceirão Moita Pinhal Novo 6 17 The Property Handbook 5. Montijo - Alcochete 6. Palmela - Setúbal Palmela Setúbal Source: CBRE

18 Warehouse and Logistics Gross Take-up in Lisbon sq m 250, , , ,000 50, Lisbon Warehouse and Logistics 0 Source: CBRE Warehouse and Logistics Stock Addition in Lisbon sq m 250, , , ,000 50, Source: CBRE 18 The Property Handbook

19 3.3. Lisbon Warehouse and Logistics PRIME RENTS PER WAREHOUSE AND LOGISTICS ZONE Zone Typical GLA (sq m) Prime Rent ( /sq m/month) Y-o-Y Change (%) Alverca - Vila Franca Xira 5, Carregado - Azambuja 10, Loures - Vialonga 1, Sintra - Cascais 1, Lisbon City 2, Montijo - Alcochete 5, Palmela - Setúbal 5, Source: CBRE, December The Property Handbook

20 3.4 INVESTMENT MARKET Investment in commercial property has been very diverse over the last decade, with regards to volumes, type of investors, origin of the capital, type of products, deal structures and values. Up until 2002 institutional investment turnover in Portugal was very low and limited to Portuguese funds and a small number of foreign investors. It was only after 2002, with the entry of the Euro, that the commercial property investment market became more dynamic with the appearance of different international players. The strong growth resulted predominantly from the renowned quality of Portuguese shopping centres that strongly attracted foreign investors, coupled with the low long-term interest rates. Other factors that contributed towards this growth were the reduction of IMT (property transfer tax) in 2004, from 10% to 6.5% making the acquisition of Portuguese assets more attractive, together with the change introduced in 2005, in the Property Investment Funds regulation, which meant that closed-ended funds were then able to leverage without restrictions registered the highest property investment activity in Portugal, fuelled by the easy access to credit from which investors benefited during that period. Activity in this market was not affected by the abolishing of total exemption from IMI (annual municipal tax) and IMT (property transfer tax) for certain closed-ended funds. This meant that the acquisition and ownership of these buildings in the fund portfolio was subject to 50% of the abovementioned taxes. The world economic crisis that was felt since the beginning of 2008, considerably affected investment in Europe, with a drop in the level of property transactions in the majority of European countries. This situation was even worse in Portugal with the acknowledgement of the Portuguese public debt crisis in Surprisingly, 2010 property investment volumes totalled 710 million, twice the investment of the previous year. Nevertheless, 300 million of this total included shopping centre transactions that could almost be considered as internal re-organisation exercises and 2012 recorded, successively, the lowest overall investment volumes of the last decade. Only in the second half of 2013, with the risk of Portugal leaving the Eurozone put aside and the prospects for eventual economic growth, there were signs of recovery in the investment market, with international players showing increasing interest was the year of investment recovery in Portugal. Year-on-year (Y-o-Y) the investment turnover almost tripled to more than 850 million over the year. This was the highest value of the last six years and is in line with the average of COMMERCIAL PROPERTY INVESTMENT TURNOVER IN PORTUGAL Investment Turnover (Million ) 1,600 1,400 1,200 1, Source: CBRE 0 20 The Property Handbook

21 Investment Turnover Distribution per Property Sector Investment Turn over (Million ) 1,600 1,400 1,200 1, Offices Retail Warehouse and Logistics Other Source: CBRE In the 10 year period from 2005 to 2014 the retail sector recorded the highest share in investment volumes, followed by offices, with 50% and 31% respectively of the total invested. The same happened with the number of transactions where the retail sector counted for 46%, followed by the office sector with 29%. However, while in the past, retail turnover tended to be made up of a small number of shopping centre transactions, in the last few years there have been a larger number of smaller volume deals comprising supermarkets and high street stores. Portuguese shopping centres have attracted a significant number of international investors. This is not only because of the higher investment and debt capacity of the latter when compared to Portuguese investors, but also due to the high potential returns of this type of asset, the high quality construction, architecture and design and the popularity of these schemes amongst the Portuguese consumer. The majority of transactions involving this type of property are completed via the acquisition of the holding company of the asset in question. 21 The Property Handbook

22 PORTUGUESE AND FOREIGN INVESTMENT IN PORTUGAL Investment Turn over (Million ) 1,600 1,400 1,200 1, Portuguese Investement Foreign Investement Source: CBRE The majority of investment in commercial property in Portugal has been by foreign investors that, in aggregate terms, have represented 60% of the total transaction volume of the last 10 years ( ). Nevertheless, Portuguese investors have closed the highest number of transactions. The dominant foreign investors in Portugal have been from the UK and Germany, but new players have emerged in the last couple of years from other origin markets such as Brazil, China and North America. Most national open-ended funds have been inactive on the acquisition front, being more focused on the task of keep liquidity at sufficient levels due to high redemptions. Yields had dropped consecutively since the beginning of the decade up until That year saw yields reach their lowest values in recent times: 5.75% (gross yield) in the office sector, 5% (net yield) in shopping centres and 6.75% (gross yield) in warehouse and logistics. 22 The Property Handbook

23 PORTUGUESE AND FOREIGN INVESTMENT IN PORTUGAL However, the property investment market was significantly affected by the international financial crisis and, after this, by the Portuguese public debt crisis, resulting in several increases in prime yields, which only started to compress in the second half of PRIME YIELD EVOLUTION IN PORTUGAL % The prime yields are now still 150 basis points (b.p.) higher than the minimum registered in the shopping centre sector, 125 b.p. in the warehouse and logistics assets, and only 50 b.p. higher in the office sector. The high street retail sector, where tenant demand has been very high, has been the most resilient to the crisis recording in the end of 2014 an yield 50 b.p. lower than in the peak of the market. 5 4 Source: CBRE Q Q Q Q Q Q Q Q Q Q Q Offices (Gross) Shopping Centres (Net) High Street Retail (Gross) Warehouse & Logistic (Gross) 23 The Property Handbook

24 4. HOTEL MARKET OVERVIEW 4.1 Portuguese Hotel Tourism is one of the key strategic sectors of the Portuguese economy and in recent years it has performed strongly, mainly due to a growth in demand from the international market. The main statistical indicators show the growth of the sector and the performance over recent years. Tourist accommodation supply in Portugal has increased sustainably at 1.8% annually, between 2005 until July 2014, achieving 309,200 beds. Even in the last years, during the Hotel Supply in Portugal Number of Beds 320, , , , , , , , ,000 European crisis, supply continued to grow with an average growth rate actually higher than the 10 year average. The distribution of number of rooms by hotel category, shows a concentration of 4 star hotels which account for 26% of the market. The 3 and 5 star hotels have 15% and 11% market share respectively. Demand in Portugal has increased expressively, at a stronger pace than supply, with an average annual growth rate, in the last decade, of 2.4%. AAGR(14/05) = 1,8% AAGR(13/09) = 2,1% Jul-14 The last 2 years have been the best performing of the past 10 years with a year-on-year increase of 4.8% in 2013 and 6% in In 2014 a record high of 44 million overnight stays was registered in Portugal. The international market has had a strong impact on the tourism sector in Portugal, with a 30% increase in overnight stays between 2005 and 2014, compared with 11% of domestic demand. The last 5 years show the importance of the foreign market to the performance of the sector, having registered a growth rate of 32%, which contrasts with a decline of 6% in the domestic market. The foreign market represents currently 71% of overnight stays in Portugal. 48%. Germany and the United Kingdom are the traditional incoming markets and both have a 38% market share. Although the Spanish market has a modest growth rate of 5% in this period, it stands third on the ranking with 11% market share and has grown steadily in recent years. 24 The Property Handbook Source: Turismo de Portugal *AAGR = Annual Average Growth Rate

25 Domestic and Foreign Demand in Portugal Overnight Stays (Million) Foreign Domestic Source: Turismo de Portugal Hotel Demand in Portugal Overnight Stays (Million) Source: Turismo de Portugal 25 The Property Handbook

26 Standing out in this trend is the Brazilian market which has a growth rate of more than 100% in the last 6 years followed by France with a growth rate of 82% and the USA with 48%. Germany and the United Kingdom are the traditional incoming markets and both have a 38% market share. Although the Spanish market has a modest growth rate of 5% in this period, it stands third on the ranking with 11% market share and has grown steadily in recent years. The increase in international demand has been felt in the average occupancy rate registered in the country. After a steady increase from 2004 till 2007, the occupancy rate plummeted to a historical low in Since then, occupancy rate has shown a sustainable and strong recovery reaching 58.8% in 2014, almost 6 percentage points above the previous year and very close to the maximum of 59% achieved in Average Occupancy Rate in Portugal 60% 58% 56% 54% 52% 50% 48% 46% Source: Turismo de Portugal The Property Handbook

27 4.2 Lisbon Hotel market Lisbon tourism performance follows a similar pattern to the country as a whole, but with even stronger results. In fact Lisbon is nowadays a popular city break destination with a reputation for being one of Europe s vibrant, trendy capital cities with a good selection new hotel units, hostels and quality restaurants. Lisbon has also been awarded several international tourism prizes such as Europe s Leading City Break Destination in 2013 and Europe s Leading Cruise Destination and Cruise Port in Supply in the city of Lisbon has been growing steadily in recent years. From 2004 to 2013 it registered an average annual growth rate of 2%, to 38,200 beds. By the end of 2014, there were 36 hotels in the 5 star category and 86 hotels with 4 star. There are several international hotel brands in Lisbon which include Four Seasons, Intercontinental, Starwood, Hilton, Holiday Inn, Sofitel, Tryp, Vincci, NH, Radisson and Marriott, amongst others. It is also expected that a number of other high profile hotel brands will enter the Lisbon market including Hyatt. Demand has also grown in the same period at a 4.3% average annual rate, recording 7.3 million overnight stays in This increase is mainly driven by international demand (8% year on year from 2009 to 2013), which has currently 80% market share. Up until September 2014 a 15.5% year on year increase in the number of total overnight stays had already been observed. The main incoming markets in Lisbon in 2014 (up to September) were the Spanish and French both with 10% of the total market, followed closely by the Brazilian market with a 9% market share. From 2009 to 2013 France and Brazil registered increases of 53% and 42% respectively, while the Spanish market decreased by 18% in the same period. This increasing diversification of markets helps to strengthen Lisbon s position as a tourism destination in the global market. 27 The Property Handbook

28 Occupancy levels performed strongly in 2014 with the overall market occupancy rate achieving 72.8%, the best performance in the last 7 years. The good performance of the market is also reflected in the RevPar levels, where average values have been growing since In 2014, the market RevPar reached 57, which is the highest value in the period under analysis, achieving also a record high of 79.2 in 5 star units. This dynamics of the tourism market is expected to continue and there are 34 new hotel units in pipeline and anticipated to open in Lisbon between 2015 and The level of development activity is a strong indicator as to the attractiveness of the market not just to final consumers but also to investors, developers and operators. RevPar in Lisbon Occupancy Rate in Lisbon 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: ATL (Associação de Turismo de Lisboa) Source: ATL (Associação de Turismo de Lisboa) 28 The Property Handbook

29 5. RESIDENTIAL MARKET OVERVIEW 5.1 Portuguese Residential During the last few decades Portugal has experienced a very significant rise in its housing stock, not just in quantity but also in quality. This growth was based mainly on a model of construction and sale of completed units, to the detriment of the rental market. This was due to the combination of two effects: on the one hand, the strong incentives towards homeownership through tax incentives, low interest rates and high loan to value ratios and, on the other hand, the chronic obstacles to operating the alternative and complementary rental model. With this is mind it is unsurprising that Portugal has a high percentage of homeowners of 74.5%, higher than in several other European countries including United Kingdom (67%), France (64%) or Germany (53%) but lower than in Spain (79%). In recent years several changes and incentives have been introduced, both legal and fiscal, which have impacted very positively on the residential market in Portugal. These include, namely, the Special for Non-Habitual Residents in 2009; the Reform of the Urban Lease Law, initiated in 2006 but with relevant changes in 2012; the creation of a Residence Permit for Investment Activity ( Golden Visa ); as well as a new Urban Renovation, both in The current activity in the residential market is highly driven by the demand from foreign investors, due to the above referred legislation relating to tax incentives for non-habitual residents and the Golden Visa program. However with prospects of continued economic New Houses in Portugal Number of Houses 140, , ,000 80,000 60,000 40,000 20, The Property Handbook Source: Instituto Nacional de Estatística (INE)

30 growth, reductions in unemployment and more competitive mortgage conditions, there are signs that confidence is returning to the domestic market. The total number of homes in Portugal at the time of the last census, in 2011, was 5.9 million, which is 16% higher than in Currently the number of homes is 1.4 times superior to the number of households, in comparison to its neighbour Spain with 1.6. The number of new homes concluded per year in Portugal has plummeted, from 126,000 homes in 2002 to approximately 21,000 in An effect of the recent economic and financial crisis was the hardening of mortgage conditions, with the increase of financing costs, decrease of loan to value ratios and stricter risk analysis criteria. As a result, from 2005 until 2012 the number of sales contracts of urban property in Portugal dropped by around 60%. However, according to INE, the number of sales volumes started to rise in 2013 reaching approximately 80,000 houses. In the first nine months of 2014, circa 59,000 houses had already been sold throughout the country, showing a 6% year on year increase. According to data from APEMIP, 22% of real estate properties sold in Portugal in 2014 were purchased by foreign investors, mainly from United Kingdom (23%), China (18%) and France Houses SOLD in Portugal 140, , , Up to Q Source: Home Price Index, Instituto Nacional de Estatística (INE) [1] Includes residential units as well as other urban properties, being the great majority residential premises. 30 The Property Handbook