Inflation and interest rates - the impact on real estate: which sector shines brighter?

The real estate market continues to show resilience, but is not immune to the current economic context marked by high inflation and rising interest rates. The truth is that real estate market activity in Portugal developed differently in the first quarter of 2023: while commercial investment, residential sales and office occupancy slowed, activity in logistics, retail and hospitality shone, exceeding the performance of the last two years.

Housing:

• The beginning of the year was marked by a new decline in sales (down about 5% from the previous quarter), continuing a trend that has been in place since 2022
• there are also some' 'adjustments in average sale prices in Lisbon (down 3% to €4,200/m2) and Porto (down 6% to €2,800/m2)
• despite the current situation, demand, based on the Portuguese, continues to outstrip supply

Offices:

• Lisbon occupancy was around 20,000 sqm per quarter, less than half the average over the last five years
• activity in Porto was approximately 8,000 sqm, 41% below the five-year average
• A slowdown in office occupancy is also evident in other European markets due to uncertainty

Commercial real estate investment:

• In the first quarter of 2023, transactions amounting to 240 million euros were completed,' 'which is 63% below the average for the last five years
• activity was highlighted by the purchase of a portfolio of 40 supermarkets by LCN Partners for 150 million euros
• retail represented 63% of the total investment, offices 16% and logistics another 16%
most of the capital was invested by foreigners

"The sharp rise in interest rates, the rise in inflation and the tightening of financing conditions are affecting families and companies that are consumers of housing and offices ", explains Joana Fonseca, head of strategic consulting and research at JLL, emphasizing that "it is impossible to come out of this situation unscathed ".

The macroeconomic context adds to the domestic' 'Factors affecting the real estate business. "The measures of the Mais Habitação program can have the opposite effect, especially with regard to the creation of new supply and, in particular, rentals. Forced renting of unused housing or limiting rents could limit market activity and create uncertainty leading to postponement or cancellation of projects. "," said a press release sent to editors.

The report also notes brilliant performance in logistics, retail and hospitality in early 2023:

Logistics:

• in the first quarter of 2023, 214,000 square meters of space was filled, double the previous two years
• Approximately 52% of occupancy was in the region' 'Lisbon, especially the Carnaxide-Alfragide area
• only 2% of employment was registered in Porto and 46% in the rest of the country
• due to lack of supply and growing demand, rents are also rising

Retail:

• Retail sales grew 1.6% in the first quarter (year-on-year), with a "positive impact on shopping centers "
• commercial rents "reflect inflation "
• also retail sales were dynamic in both Lisbon and Porto (where the Beauliau market recently opened), with "good sales and demand for new premises "

Hotel business:

• number of tourists and overnighters' 'stays increased by 14% compared to the first quarter of 2019, to 5.1 million and 12.5 million, respectively
• In both Lisbon and Porto, hotel occupancy rates and prices for overnight stays are approaching 2019 levels
• "This is still the sector to bet on, with the opening of three new 5-star hotels (one in Faro and two in Porto) and two 4-star hotels (in Lisbon) during this period "

In general, the report notes the resilience of the real estate market in terms of yields, rental growth in logistics and stability in offices and retail, although the housing market revealed a trend of slowing prices in the two main markets of Lisbon and Porto.

With regard to real estate market activity in 2023, Joana Fonseca is confident that "segments that have slowed down this quarter will accelerate, even with potential value adjustments. On the one hand, we already have signs of greater macroeconomic stability, confirming a slowdown in inflation and a lower rate of increase in interest rates, which will affect the confidence of those who' 'who are looking for real estate for investment, employment or purchase,'" she emphasizes, adding that "there is no loss of competitiveness of real estate" and that now "all that remains is to ensure fiscal and legal stability, which is a very important factor for investor confidence and increased supply".