Soaring real estate prices in Portugal: opportunity or excessive investment risk?

The European real estate market is in full swing. Prices per square meter are reaching historic highs driven by rising immigration, and post-pandemic tourism is accelerating rentals in capitals such as Lisbon, Paris and Berlin through accommodation services such as Airbnb.

Investors may ask themselves: does this situation create opportunities or too many risks? A clue can be found in the analysis of REITs, the "foreign cousins" of Brazilian real estate funds. Despite high real estate prices, the value of REITs units is flat, with the REIT Europe Index (REITE) at the same level as in March 2020. Among the reasons for this state of the economy, still high interest rates in the Old World, as well as known problems such as low economic growth and demographic crisis. "In this situation, equity prices in the market have deviated from the real value of assets as sentiment worsens or funds are overwhelmed by redemption requests from investors," explains Thomas Monteiro, chief strategist at Investing.com.

Unusual for real estate companies production However, analysts are betting on favorable conditions for this sector this year, albeit with some caution. According to consulting firm Mordor Intelligence, the outlook for the European real estate market is positive for the next five years. European REITs are forecast to grow by 5.70% between 2023 and 2028. The expected boost comes from the economy, with falling interest rates, inflation and activity, as well as tourism, with increased travel and immigration. "Macroeconomic factors, such as a strengthening economy and lower inflation, should contribute to positive sentiment and better results in 2024," Monteiro agrees, adding, "The lack of confidence in the European REITs market, especially in the U.K., is still a risk to watch."

Focus on housing

Similar to Brazil, the commercial real estate rate is declining in Europe. Much of the energy in the market is concentrated in the residential segment in major capital cities. Data from consultancy firm Mordor Intelligence shows that in the third quarter of 2020, the residential real estate sector contracted by 3.1% compared to 2019, but house prices rose by 6%. In subsequent years, the sector has recovered to pre-pandemic levels.

How to invest? The European REITs industry was valued at $250 billion in 2023. The market leaders were five companies: Segro Plc (SGRO), Land Securities Group (LAND), Derwent London Plc (DLN), Unite Group Plc (UTG) and MERLIN Properties (MRL).

Another option is to invest in U.S. REITs that have exposure to Europe. Some of them are: Prologis (PLD), Simon Property Group (SPG), Public Storage (PSA). ETFs listed on U.S. exchanges are also an alternative to investing in European REITs. However, in this case, passive exposure to multiple assets will be obtained. Depending on the fund, there may also be exposure to REITs in China, Japan and other countries. For example, the Vanguard Global ex-U.S. Real Estate ETFs (VNQI) and the SPDR Dow Jones Global Real Estate (RWO).

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