Portuguese Commercial Property MarketView

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1 Portuguese Commercial Property MarketView H Global Research and Consulting OFFICE TAKE-UP NEW RETAIL STOCK WAREHOUSE TAKE-UP HOTEL OCCUPANCY RATE INVESTMENT VOLUME SLOW RECOVERY WITH INVESTMENTS PICKING UP BUT A CAUTIOUS OCCUPATIONAL MARKET Macroeconomic Indicators 2013 GDP (y-o-y change) - 2% Unemployment Rate (June) 17.4% Private Consumption (Q2) -5.6% Retail Trade Turnover (June) -5.4% Source: Banco de Portugal, INE and Eurostat GENERAL OVERVIEW The first half of 2013 was marked by the prospect of Portugal returning to the financial markets this year, the economy upturn in the pipeline and the consequent increased tenacity of various economic sectors. This feeling has prompted the negative trend of indicators of consumer confidence and economic climate to slow down, and the foreign investor interest in Portuguese real estate to increase. However, the leasing market has remained cautious, with very few transactions in most of the real estate segments; high street retail in the top areas is an exception to this, where demand for new retail space is still going strong. The hotel sector also shows signs of recovery, with a significant increase in the number of overnight stays and improved performance indicators Trends Office Take-up New Supply Prime Rents Retail Take-up New Supply Prime Rents Warehouses & Logistics Take-up New Supply Prime Rents Annual change Annual change Annual change MACROECONOMIC CONTEX T Portugal posted in the second quarter of 2013 the largest economic increase in the Euro Zone, with an increase of 1.1% in GDP compared to the preceding quarter. Nevertheless, the economy contracted 2% on a year-on-year basis. The summer projections of Banco de Portugal suggest a drop of GDP of 2% for 2013, although less pronounced than the numbers projected in the previous report, showing that exports are expected to grow more favourably. The drop in private consumption will be lower than last year, yet still significant, of c. 3.4%. The unemployment rate seems to have finally reversed the upward trend after reaching a peak in April According to Eurostat, the unemployment rate in Portugal at the end of June stood at 17.4%. The economic climate indicator and the confidence indicator have also maintained a recovery curve since the beginning of the year, after reaching the minimum thresholds in their series in December Similarly, the rate of turnover in retail showed, over the first six months of 2013, increasingly less negative annual variations, according to data released by the INE. Despite these more positive indicators, the growth of domestic economy is still much influenced by heavy tax rates and the high unemployment rate, therefore the much desired recovery will be slow. It is yet uncertain whether Portugal will manage to meet the budget deficit imposed by the Troika and perhaps need a second bailout in Investment Investment Turnover Prime Yields Annual change

2 H Portuguese Commercial Property MarketView OFFICE MARKET LISBON AND PORTO LISBON Introduction The office stock is concentrated in 6 well-defined zones, the locations of which are indicated on the map below. The main zones make up the CBD (Central Business District) and are located in the city centre. The high quality office buildings situated outside the defined zones are integrated in a wider area called Other Zones. Take-up In the first semester of 2013, office take-up was of 25,900 sq m, reflecting a 28% drop compared to 2012, and the lowest semester in terms of occupancy rate since this information began to be collected. There were a total of 85 take-up transactions in the semester, 85% less than in the same period in Note that of all the transactions recorded, only two had areas over 1,000 sq m. Parque das Nações recorded the highest share of occupied area in the semester, with 23% of all take-ups, followed by the Western Corridor and CBD1, with 20% and 17% respectively. However, the transaction involving the largest area (about 1,800 sq m) was in Other Zones, i.e., outside the main business locations in the city. On a positive note, 48% of transactions in the first half of the year were the result of the expansion of the occupied area or the establishment of new companies in, showing an increase in the business activity in the city and a much higher share than the 36% recorded in the preceding year. Most of the transactions (24%) involved companies in the TMT's & Utilities sector. However, the highest percentage of occupied area (23%) results from the activity of Corporate Services providers. Chart 1: Office Take-up in 140, , ,000 80,000 60,000 40,000 20,000 0 H H H H H H H H H H Map 1: Office Areas in Source: / LPI 2

3 Table 1: Major Office Take-up Evidences in (H1 2013) Building Zone Occupier Area (sq m) Amilcar Cabral, 25 7 Randstad 1,782 Atlantis Business Centre 5 NOV 1,203 Palácio Sottomayor 1 PWC 941 Torres de Lisboa 3 Mazrs 934 Central Office 5 Sitel 864 Source: /LPI Supply Throughout the first half of 2013, an office building was concluded in the Liberdade 225 building, with about 4,600 sq m. This was a speculative venture and the property is now being marketed. With the low take-up level and the completion of new buildings, the vacant office spaces continue to increase and, consequently, the availability rate. At the end of June 2013, there were nearly 600,000 sq m of vacant spaces and an availability rate of 13.2%, more than the 12.4% at the end of Throughout the semester, the availability rate increased in nearly all the business areas in the city, with the exception of Parque das Nações, where this rate dropped nearly two percentage points to 13.6%. The Western Corridor has maintained a high availability rate, the highest in the city, standing at 27.2%. An additional 4 office buildings are expected to be concluded in the second half of the year, adding 28,400 sq m to the city stock. Three of these new buildings are speculative constructions and are located in the CBD. Table 2: Office Pipeline H Building Zone Area (sq m) Etoile (Liberdade 240) 1 1,850 Barbosa do Bocage ,000 Duarte Pacheco ,250 Novartis Portugal HQ 6 7,300 Total 28,400 Source: /LPI Rents Prime rents have again fallen in the zones with the highest availability rates, such as Parque das Nações and the Western Corridor, with drops of 4% and 5%, respectively compared to the end of In these zones, most of the transactions involve quality property, which in turn is reflected in the prime rent value which is identical to the average rent. Some contacts are being negotiated, and if they do come through, they will help increase the take-up in the second half of the year. Chart 2: Gross Rents, (Q2 2013) Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Source: /LPI Nonetheless, the current fragile economic and financial situation is expected to continue to influence the expansion plans of companies, with the key decision-makers focused on cutting costs, reducing the areas they occupy and renegotiating leases. So, the annual gross take-up is not expected to exceed 100,000 sq m, maintaining the values similar to those of the preceding year, and still far below the annual average of 165,000 sq m recorded in the last decade, in the pre-crisis period. The joint effect of the supply available and the buildings under speculative construction are expected to pressure prime rents to drop in the CBD. PORTO Introduction divides the Porto region into 4 business zones, namely: Boavista, Downtown, Vila Nova de Gaia and Maia. The Av. da Boavista axis is the most prestigious business zone of the North of Portugal. estimates that the Porto office market stock is of about 1,000,000 sq m, with the completion of about 200,000 sq m over the last 10 years. Performance If the office market is being profoundly affected by the economic and financial crisis, the situation in Porto is all the more serious. recorded in the first semester of 2013 a gross take-up in Porto of only 1,800 sq m, the lowest indicator since this data began to be collected. A new office space was inaugurated in Mercado do Bom Sucesso with a total of 2,100 sq m, of which 1,200 sq m were meant to be occupied by the actual developer. The prime rent remained stable at 12 /sq m/month. Average Rent The levels of the gross take-up should remain quite low in the second semester of 2013, and an increase in the availability rate is expected, as well as the reduction in the prime rent. 8.4 Prime Rent /sq m/month S Commercial Real Estate, Portugal MarketView 3

4 H Portuguese Commercial Property MarketView 4 RETAIL MARKET PORTUGAL High Street Retail in Prime locations for street retail in are found in Avenida da Liberdade and Rua Garrett, in Chiado. Other street retail with a steady demand is Rua Augusta, in Downtown, and in other streets adjacent to Rua Garrett. The retail area in Príncipe Real is being regenerated, through the rehabilitation of buildings and a distinctive design offer, and the introduction of new brands and concepts. Since the beginning of the year, 12 stores have opened in the main retail streets in the city including Cartier and Max Mara. Other stores are also expected to open, such as Aristocrazy, Michael Kors, Penhalta and Torres Joalheiros, all located in Avenida da Liberdade. Other insignias have also announced their intention to open new stores here, for e.g., Guess, Boutique dos Relógios Plus and Fancy Jewellers. While across the country there is a significant number of vacant retail spaces, these are scarce in the main retail streets in. In Avenida da Liberdade we find over its entire length nearly one hundred high street units, of which 7% are today vacant. In Chiado, and taking into consideration only the most sought axis, which includes Largo do Chiado, Rua Garrett and Rua do Carmo, only 5% of stores are vacant, and none is in Rua Garrett. It appears that has become, over the last few years, a more experienced city, offering varied products, new restaurant concepts, a vast programme of events and a strong cultural agenda. The rehabilitation and refurbishment of buildings in the city centre have contributed to this dynamics. With this purpose in mind, several restaurants and leisure venues opened last year in the buildings in Terreiro do Paço; in September a new retail project opened in a former palace-type house in Príncipe Real. Dubbed the Embassy, this space has a gross lettable area of about 750 sq m spread over about 15 stores (rooms) offering mostly Portuguese products. The prime rent in rose 6% in early 2013 to 90 /sq m/month. High Street Retail in Porto The take-up of high street retail increased compared to last year. This dynamics is reflected in Downtown Porto only, more specifically in the areas of Clérigos, Santa Catarina, Cardosas and Mouzinho da Silveira. The demand is mainly for small areas and restaurant use. Some of the openings this year include the international insignia Paez, HUGO by Hugo Boss and Max&co. The prime rent remains at 25 /sq m /month. Retail Schemes The surface area occupied in Portugal for retail developments is currently of 3.6 million sq m, including areas in shopping centres, retail parks and other formats such as outlets, leisure centres and hypermarkets with a retail gallery. In the first semester, the Algarve Shopping expanded a further 3,000 sq m, but no other project is expected to be concluded until the end of the year. However, several retail developments are in the pre-letting phase, their opening being limited by the pace at which stores are being leased. Following up on the previous year s trend, the Alvalade Shopping centre, located in the centre of, will reopen fully revamped and with a new tenant-mix in the last quarter of 2013 with 4,500 sq m. Table 3: Retail Developments in Pre-Letting Phase Source: Although confidence rates have picked up over the first semester, shopping centres continue to suffer from low consumption rates and, in some places, from excess competition. In many shopping centres, the occupation of vacant stores is achieved with the introduction of pop-up stores (with short-term contracts), attracting local tenants and variable rents. Rents have fallen significantly in recent years and only in the best shopping centres have the prime rents remained stable at 85 /sq m/month. Name Type Gross Letable Area(sq m) Expected Opening Évora Fórum Shopping Centre 16, Alegro Setúbal Shopping Centre 41, Dolce Vita Braga Shopping Centre 40, Forte Center (Carnaxide) Shopping Centre 14, Ikea Algarve Shopping Centre 70, Algarve de Style Outlets Outlet 25, Setúbal Center Shopping Centre 20, There is already a shortage of good properties in Avenida da Liberdade and Rua Garrett to allow new operators to come into play, which, in the near future, could bar the dynamics registered in recent years. As to shopping centres, given the maturity of the market and the constraints in the expansion plans of most operators, the demand is expected to remain low. Therefore, the marketing period of new developments is much longer than in precrisis times (usually the two years of construction), with works starting only when a high occupancy rate is guaranteed.

5 Porto WAREHOUSE AND LOGISTICS MARKET GREATER LISBON AND GREATER PORTO Greater The Greater warehouse and logistics sector is distributed into 6 zones, identified on the map below. The more central zones in the City area (Zone 4), Sintra- Cascais (Zone 3) and Loures-Vialonga (Zone 2) are characterised by the supply of smaller sized, often of mixeduse warehouses. In a second ring, we find 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), offering middle-sized warehouses. The Carregado - Azambuja axis (Zone 1.B) is the furthest from the city and houses the larger warehouses (> 10,000 sq m) occupied by the major logistics operators and food distribution chains. Map 2: Warehouses and Logistics Zones in Greater Although speculative development is negligible in recent years, the availability rates are still high. The high supply of vacant areas in the Alverca - Vila Franca de Xira axis has resulted in a drop of 7% in rent in this location in the first semester of the year, to 3.25 /sq m/ month. In contrast, the supply remains low in the Loures-Vialonga zone. Prime rent for logistics space (with about 10,000 sq m) has remained at 3.25 /sq m/ month for the past year. Greater Porto The warehouses and logistics stock in the Greater Porto area is concentrated in 4 zones: Matosinhos and Perafita, Airport, Maia Industrial Zone and Vila Nova de Gaia. The Greater Porto area, in the period under analysis, recorded a gross take-up of 24,000 sq m, which is three times greater than the area occupied in the preceding semester, but half the take-up in the same period of the year before. The logistics warehouse currently under construction in the Leixões Logistics Platform, with 20,000 sq m, will be occupied by the logistics company Luís Simões. S Commercial Real Estate, Portugal MarketView The prime rent for logistics space remains at 3.25 /sq m/ month. Table 4: Main Warehouse and Logistics Take-up Evidences (H1 2013) Occupier Activity Zone Area (sq m) Urbanos Logistics Loures 22,000 Jerónimo Martins Food distribution Azambuja 20,000 BOMI Logistics Montijo 11,500 Coviran Food distribution Mem Martins 9,800 Luís Simões Logistics V. Nova de Gaia 6,200 Garland Logistics Maia 4,000 RAR Industry Matosinhos 3,850 Jerónimo Martins Food distribution Matosinhos 3,650 The demand for storage spaces is mostly for small sized areas. Still, in the first half of 2013, significant transactions took place in the Greater region, which leveraged the total take-up of industrial and logistics spaces in the semester. In the Greater area, the gross take-up in the first half of 2013 was of 77,000 sq m, showing a growth of 18% compared to the preceding semester, and of 15% compared to the same period in the previous year. Sources: The contraction in the domestic consumption should continue to penalise the real estate sector of warehouses and logistics, although the increase in exports is expected to mitigate this trend. Companies in the logistics and food distribution sectors are expected to concentrate their occupied areas, with a view to optimising their activity and benefit from the high supply and lower prices. However, they are not expected to expand much. Speculative development will continue to be greatly reduced. 5

6 H Portuguese Commercial Property MarketView TOURISM MARKET IN CO-OPERATION WITH NEOTURIS LISBON HOTEL MARKET Supply and Demand Data from the Tourism Observatory point to an increase of 650 rooms in the first 8 months of 2013 with the opening of 5 new units and the refurbishment of another two units. This increase reflects a variation of about 4% since the end of last year, which is higher than the annual average growth rate recorded in the last decade ( 3.6%), showing some momentum in hotel investment in the city. Four new hotels are expected to open by the end of the year, totalling 394 rooms, accentuating this increase. Note that hotels have experienced serious competition with the opening of a different type of accommodation - Alojamento Local - in the form of apartments for short term rentals and hostels, particularly in the historical part of the city. These figures, however, are not official. As regards demand in the hotel sector, the market is still on track towards growth. Data available for 2013 point to an increase of 6% in the number of overnight stays in the first 5 months of the year compared to the same period in the year before. Moreover, these figures do not include Local Accommodation, which would have a material impact if it was considered. Note also the strong growth of some origin markets, such as Germany (+14.8%), Holland (+22.2%), Russia (+24.1%) and Angola (+ 18.6%). Chart 3: Occupancy Rate per Room in Greater 77% 61% 55% 76% 76% 60% 49% 64% 53% 69% 62% 52% 74% 69% 56% Source: Tourism Observatory 81% 74% 57% 75% 51% 42% 69% 71% 69% 65% 70% 69% 52% 70% 71% st Half Star Star Chart 4: Average price in Greater % % 68% 67% 67% 54% 3 Star Hotel Sector Performance The analysis of the key performance indicators of the hotel sector gathered by the Observatory also shows positive signs in Greater, defying the trend in In the first half of the year, the occupancy rate of all the 3 to 5 star hotels in the city increased 1.5 p.p. compared to the same period a year earlier, to 63.6%, despite a drop in the 3-star establishments. The average price per hotel room sold also increased in the 3 categories under analysis, increasing 4.8% in the first half of the year compared to the equivalent period in 2012, for all the 3 to 5 star hotel establishments. The trend was more pronounced in the 3-star hotels. This performance resulted in an increase in the average price per available room (RevPar) in all categories. Other types of accommodation including hostels and short term rental have had a detrimental impact on the hotels average room rates as they provide an alternative to traditional hotel establishments Source: Tourism Observatory RESIDENTIAL TOURISM 70 The implementation of the Golden Visa at the end of 2012 has impacted on the residential tourism sector. Through this instrument, foreign citizens who purchase property worth 500,000 or more are granted a residence visa. To date, about 200 Golden Visas have been issued, most of which relating to the purchase of real estate, to clients from China, Russia, Brazil and South Africa. The region has benefitted the most from this instrument, and the next semesters will be fundamental to understand the real importance that this may have in the overall demand st Half

7 Million INVESTMENT MARKET PORTUGAL Performance Investment turnover in commercial real estate in Portugal amounted to 145 million euros in the first half of the year, meaning an increase of 38% in the total amount accumulated in The investment activity is, however, still very low, particularly when compared to the annual average of 800 million euros recorded in the period Chart 5: Annual Turnover for Real Estate Investment in Portugal 1,600 1,400 1,200 1, Source: The highlight in this semester, due to the investment involved, was the purchase of 50% of CascaiShopping by Sonae Sierra (partly owned by the British group Grosvenor), who will henceforth control the entire shopping centre. With the exception of the CascaiShopping deal, all investors were of Portuguese origin, most of them private investors, although the category of open-ended funds contributed with the largest amounts invested. Note, however, that with the exception of one investment fund, the Portuguese open-ended funds remained inactive, on the acquisition front, and the volumes managed by these entities have continued to drop. According to the APFIPP (Portuguese Association of Investment Funds, Pension Funds and Asset Management) the volume managed by the Portuguese open-ended funds as at 30 June 2013 showed a decline of 1.8% since the beginning of the year. Chart 6: Transactions per Activity Sector 8% 17% 8% 839 1,382 8% ,401 59% Retail Office Shopping Center Leisure I&L H Most assets traded are retail units, offering accessible investment volumes to private investors and good yields compared to other financial alternatives available in the market. Prime yields have remained stable since early 2013 and show a gap, in respect of the market peak, of 275 basis points (b.p.) in shopping centres, 250 b.p. in offices and logistics assets, and 100 b.p. in high street retail. Chart 7: Prime Yields % Source : Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Offices (Gross) High Street Retail (Gross) Shopping Centres (Net) Warehouse & Logistic (Gross) The foreign institutional buyers have once again turned to Portugal this year, showing interest in various assets available for sale, in particular in the office sector. One or two transactions with one of these players are expected to take place still in 2013, stirring up the market and attracting other more conservative foreign investors. Private investors and family offices will continue to do business in In general, they are interested in property of about 5 and 15 million euros, respectively, well located and covered by secure lease agreements. Foreign investors, particularly the Chinese, seeking a Golden Visa and who initially only looked for residential property have now turned their interest to commercial income property. Some transactions with this type of investors are expected to take place until the end of the year If the current market activity remains unchanged, the annual investment turnover is expected to exceed 200 million euros S Commercial Real Estate, Portugal MarketView 7 Source:

8 H Portuguese Commercial Property MarketView CONTACTS PORTUGAL For more information, please contact: Research Portugal Cristina Arouca Associate Director Research and Consultancy e: Carlos Récio Associate Director Retail Agency e: André Almada Senior Director Offices, Retail and Industrial Agency e: Leonardo Peres Senior Consultant Retail Agency e: Tim Seconde Associate Director Capital Markets Lisboa e: Eduardo Abreu Partner Neoturis Praça Duque de Saldanha, 20 r/c dto Lisboa t: e: Global Research and Consulting This report was prepared by the Research Team of Portugal, which is part of Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 8 Disclaimer Limited confirms that the information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively to be used by clients and professionals, and all rights to the materials are reserved and cannot be reproduced without prior written permission of.