Rising real estate prices in Portugal: an investment opportunity or too much risk?

The European real estate market is booming. Prices per square meter are reaching historic highs, supported by high levels of immigration, and post-pandemic tourism is accelerating rental growth in capital cities such as Lisbon, Paris and Berlin through accommodation services such as Airbnb.

Investors are wondering: does this situation represent an opportunity, or too many risks? One indicator can be found in an analysis of REITs, the "foreign partners" of Brazilian real estate investment trusts. Despite the high price of real estate, REITs' share price remains in place, with the REIT Europe Index (REITE) at the same level as in March 2020. High interest rates in the Old World, as well as known issues such as low economic growth and demographic crises, are also among the reasons for this state of affairs. "In this environment, equity valuations in the market have moved away 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. Still, analysts are betting on positive trends in the sector this year - albeit with some caution.

According to a Mordor Intelligence advisory, 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 acceleration is driven by economic development, lower interest rates, inflation and tourism activity, with more frequent travel and immigration. "Macroeconomic level factors, such as a strengthening economy and lower inflation, should contribute to a positive mood and improved results in 2024," Monteiro agrees, noting: "The lack of confidence in the European REITs market, especially in the UK, still represents a risk to watch."

Attention to residential premises

As in Brazil, interest in commercial real estate is declining in Europe. Most market activity is concentrated in the residential segment of major capitals. Data from consultancy Mordor Intelligence shows that in the third quarter of 2020, the residential sector declined by 3.1% compared to 2019, but house prices rose by 6%. In the following years, the sector recovered to pre-pandemic levels.

How to invest?

The European REITs industry was valued at USD 250 billion in 2023. The market leaders are five companies: Segro Plc (SGRO), Land Securities Group (LAND), Derwent London Plc (DLN), Unite Group Plc (UTG) and MERLIN Properties (MRL). All of these real estate companies are listed on European exchanges, most of which are on the London Stock Exchange.

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 for investing in European REITs. However, in this case, the exposure will be passive and multi-asset. Depending on the fund, you can also get exposure to REITs in China, Japan and other countries. The Vanguard Global ex-U.S. Real Estate ETF (VNQI) and SPDR Dow Jones Global Real Estate (RWO) are examples of such funds.

Want to learn how to invest - and profit - overseas? Sign up for InfoMoney's newsletter to receive tax information, dispatch procedures, and advice on how to allocate your capital overseas. It's free!