REAL ESTATE IN PORTUGAL

1. REAL ESTATE IN PORTUGAL Monteiro de Barros Civil engineer Counselor of real estate Certified property manager

2. REAL ESTATE IN PORTUGAL THIS SHORT INTERVENTION AIMS AT GIVING OUR POSSIBLE VISITORS A GENERAL IDEA ABOUT THE OPPORTUNITIES THAT THE LOCAL REAL ESTATE MARKET OFFERS TO THE INVESTORS IN THIS COUNTRY

3. REAL ESTATE IN PORTUGAL We will pass in review:- the possible motivations of the investors - the special features of the real estate assets - the present situation in Portugal- the different types of interesting real estate properties - the current levels of rents, prices, yields and appreciations.

4. Motivations of the investors Motivations of the investors: • a use, or a desired periodical income, • a foreseen rate of return • an increased final value(appreciation) • an easy transformation in cash (liquidity) • a low probability of not realizing this aims (risk)

5. Motivations of the investors The typical investments (for comparison): Recent economical evolution : Plumbing of interest rates Plumbing of inflation Decline of stock market Increased interest on the real state markets

6. Comparable conditions to be taken in account Real Estate Investments: C = 4%+2%+1,8%+4%+1,5%= 13,3% Rate return treasury bills inflation of the currency depreciation of the asset (*) premium of risk(**) premium of lost liquidity As we are going to see, this compensating value is perfectly compatible with many possibilities offered through the total of rate of return + appreciation >13,3% by the real estate markets in general, particularly in Portugal __________________________________________________ (*) (only the structures’ obsolescence)75%: 40 years = 1,8%/year (**) Half that one of the stock market

7. The figures assumed before as averages for real estate investments, must be naturally changed at considering each individual case, regarding : the local market in question the moment of the possible operation the type of real estate property the economical conjuncture the financial data and the available financial support the consequent foreseen risk the resultant capitalization rate deduced consequently Features of the real state assets

8. Features of the real state assets The real estate markets (market zones or zones of competition) have (small) dimensions - in what concerns offer, demand and prices - conditioned to the commuting time-spans (30 to 45 minutes) between dwelling-employment, dwelling-retail, office-clientele, office-linked government agencies, etc. And, in each zone, may be different the situation concerning housing, offices or retail. Nevertheless regarding the other aspects, they may have common subordinations with the neighbouring market zones, concerning, taxes, regulations, laws, etc. The special conditions of the subject market

9. Situation in Portugal The real estate markets in Portugal: Thus, in rigor, we cannot speak about the “Portuguese real estate market”, or even about the “Lisbon housing market”, despite, for instance, the common influence of the renting legislation or of the low interest rates, falling upon all of the market zones encompassed. Regarding Portugal and in what concerns these common features, we are going to observe some main aspects : • Present Situation in Portugal • General characteristics

10. Situation in Portugal Present situation: • Excellent geographic situation between Europe, Africa and America (a good network of business) • 9 centuries of History, with strong economical relationships with the European countries as well as with its ancient territories (Brazil, Angola, Mozambique, Cape Verde, Guinea,etc) and also with the colonies of Portuguese immigrants around the world, from USA to Australia (network of interests) • As a democracy, Portugal is a politically stable environment for business, thus not subject to major incertitude's than those of the normal political changes center-right, center-left. (small political risk) • As a member of the European Union, it enjoys also the stability of the EURO as its currency (small financial risk)

11. REAL ESTATE IN PORTUGAL From the climatic point of view, Portugal has a very temperate climate, with annual average temperatures of about 16º C, and a correspondent fluctuation between a minimum of 5º C in winter time and a maximum of 35º C in summer time. The annual rainfall is only of about 900 mm in the coast (500 mm in the in-land), giving place to a very high percentage of sunny days (from 1/1/61 up to 31/12/90, a 29 years average of about 2.750 hours of sun by year, with the monthly distribution presented in the annexed chart. General conditions:

12. Situation in Portugal General conditions: Its population, of about 10 millions inhabitants, has a very irregular distribution over this continental territory, due to its gradual attraction to the West Atlantic coast, where are located the 4 or 5 bigger cities of the Country. 2/3 of the population has been concentrated in a narrow strip, of about 60 Km of width and 350 Km of length, (from Setúbal, at the South, up to Braga at the North), dominated by the two main urban and economical zones (of Lisbon and Porto).

13. Different types of real state properties • housing • offices • retail commercial centres and stores • touristic properties and developments

14. Different types of real state properties The referred concentration of the popu-lation, over lapsed a rents freezing da-ting of 1910, which gave place to a gra-dual reduction of the existing dwellings yields and of the house building, to a shortage of spaces, a decay of the exis-ting stock, and to a rise in rents and pri-ces after the liberalization of the new rents, mainly in the Lisbon region.In the annexed chart the evolution of the rents in Lisbon during the last years Housing:

15. Different types of real state properties Housing: Nevertheless, after the liberalization of the new rents, the correspondent national in-dexes referred to January 1988 (100%) were, (after 15 years), in April-May 2003 of 201% and 286,5% Thus, the present low levels of the interest rates have created a strong appreciation of the properties very interesting opportunities for the buying of the old structures (abundant, with better location and lower costs), their rehabilita-tion (or reuse), and their selling with prices close to those of the new building. But, after April-May 2003, due to the restrictive conjunctural measures of the government, the level of the offer prices and that of rents have been stagnant, confirming the next beginning of a new cycle (rise) with the reestablishment of the high apprecia-tion rates which were verified during the previous 15 years

16. Indeed, excluding this current exceptional period of contention, and using these national indexes, we can deduce, up to May 2003, an average appreciation of offers and of rents respectively of offers : (287,9 – 100) :15,4 years = 12,2%/year rents : (201,0 – 100) :15,4 years = 6,6%/year corresponding to both perspectives used for appraisal of buildings and thus for evaluating their appreciation

17. Different types of real state properties . Housing returns: At a local level (Lisbon) we can even deduct the possible returns on investment with the values of the average rents and those of the average offers (exceeding at least 10% those of the real transactions, thus giving place to even higher levels of return) the following yield values in the different districts of Lisbon.

18. Different types of real state properties Housing (Conclusions): Taking the current annual values of appreciation+return we have maximum = 6,0% +10,0% = 16,0% minimum = 3,1% + 6,3% = 9,4% With the perspective of the retaking the previous trend of appreciation during 15 years, averaging around 6,6% according to the evolution of rents (appraisals based on the income) and around 12,2% according to the evolution of the offer prices (appraisals based on the market values), we attain, for return+appreciation, figures much higher than the minimum convenient capitaliza-tion rates (13,3%), between 16,6% and 18,5%

19. Offices Retail and shopping centers They attain values/m2 at the same level or even higher than those of housing but constitute a smaller sector of the markets and have a moreirregular evolution along the time.

20. Dueto the climatic conditions before mentioned and to the agricultural policy of the EU, big extensions of fields may be considered as affordable and adapted to touristic development not only along the 800 km of shores (already exploited mainly in the South) but also in larges regions of the in-land, either using them for vacations or week-end farms, or as lake resorts (around the dams) Hotels, restaurants and touristic resorts

21. Despite the fact that (due to the lack of existing statistical data), it is not possible to present, for these types of investment, a perspective of return similar to that made for housing (su-fficiently satisfactory), we may nevertheless, observe that they have attracted a much bi-gger volume of capitals as foreign invest-ments, allowing us to admit that they have had similar, if not better results.

22. Current situation and the future In view of: - the present low level of local prices and of the interests rates - the growing general afflux of capitals to the real estate, - the symptoms of a coming recovery of the local economy, - the perspectives of a future rise of local prices the before mentioned conditions in Portugal allow us to consider the current situation as a very good opportunity to start real estate in-vestments here, in: - rehabilitation or reuse of residential and other ancient structures - development of agricultural lands as vacations or week- end properties, specially in the shores or around the artificial lakes