For a capital city of a Western European nation, Lisbon’s prime real estate offers value on a global stage. It also provides its residents a quality of life superior to that of many larger cities. Figure 4 compares mainstream residential prices per square metre in Lisbon, against our measure of quality of life (cost of living, crime, pollution, and weather) across ten global centres.
The prime markets draw demand from a diverse international base
FIGURE 4Residential prices and quality of life rankings
Source: Savills World Research
Lisbon’s mainstream residential prices, at €1,280psm are two thirds that of Madrid (€2,100), a third of Berlin’s (€3,400) and a tenth of London’s (€11,400). Prime prices, at €5,000psm, compare favourably too (Figure 5). Lisbon also offers the highest quality of life of the ten cities benchmarked here, based on its low cost of living, low crime and pollution and pleasant climate.
Property is good value by global standards, but rents are low too, given the limited spending power of locals and higher supply provided by investors. From an investor perspective this is reflected in gross yields at around 4%, modest by international standards outside the major world cities. Future investment performance will therefore depend on economic growth and increased local earnings.
FIGURE 5Prime prices per square metre
Source: Savills World Research
The Portuguese residential market has entered a period of recovery. Prices grew by 3.8% in the year to February 2016, 6.6% above their lowest levels of 2013. More properties are trading. Transactions increased 27.4% on an annual basis to stand at 107,300 by Q4 2015.
Lisbon’s residential market has outperformed the national average. Prices across the whole of Lisbon increased by 4.4% in the year to February 2016, and stand 11.9% above their 2013 low.
These INE statistics show modest price growth in the whole market, but the performance in some of Lisbon’s prime markets has been stronger. New product of increasingly superior quality, aligned to international standards, has contributed to higher price uplift in some submarkets. As a consequence, prime prices in Lisbon have grown by around 30% over the 2013–16 period.
The emerging nature of Lisbon’s prime markets means prices vary significantly on a building by building basis. Even on Avenida da Liberdade, Lisbon’s best address, only the best buildings command prices in excess of €5,000psm, with individual properties achieving more than €8,000psm.
▲ Rossio Square
Lisbon’s prime markets benefit from a diverse international demand base. The Chinese, who have accounted for 83% of golden visa purchasers over the last five years, favour new build properties. Russians, South Africans, the French and other northern Europeans purchase more broadly and are attracted to the city’s historic core.
Brazilians are an important buying group, drawn to Lisbon by the Portuguese language and city lifestyle. They are particularly active in regeneration projects, buying into ‘authentic’ Lisbon. Lisbon is one of the few markets outside the Americas that sees buying activity from Brazilians in any volume, and longer-term, represents a huge prospective growth market from this populous emerging nation.
Domestic purchasers are returning to the market, assisted by low mortgage rates (averaging 2.1% at March 2016) and a greater propensity for banks to lend.
Lisbon’s current renaissance is one of urban living and the rediscovery of its historic centre. This is in contrast to Lisbon’s last surge of development in the late 1990s, characterised by new apartment buildings in peripheral districts, notably Parque das Nações.
New buying activity has spurred new development. New dwelling construction in Lisbon has grown rapidly since 2013 (see Figure 6), up 51% in the year to February 2016, a faster rate to Portugal as a whole. Although increasing, housing delivery remains well below pre-crisis levels; 1,296 dwellings were constructed in the year to February 2016, 91% less than in 2007 when 13,905 were delivered.
Sales of prime new developments are now occurring off plan as inventory has been diminished. Lisbon’s stock of historic buildings is gradually being renovated. Such is the demand for residential projects, conversions for residential use are outcompeting those for office use.
FIGURE 6Annual change in new residential construction
Source: Statistics Portugal
The reform of Portugal’s tenancy laws have made residential investment for income a more appealing proposition. There exists good underlying demand for rental property but with a weak (albeit recovering) domestic economy, spending power among locals is limited. Yields for quality, long-term rentals stand at around 4%.
Given Lisbon’s rapid growth as a tourist destination some investors instead target holiday rentals. Achievable yields are higher and owners have the flexibility to occupy the property themselves for part of the year. Modernised apartments in older districts such as Alfama and Miradouro are popular with holidaymakers seeking an authentic Lisbon experience.