Tourists and real estate investors home in on Porto

Porto has become one of Europe's most acclaimed holiday destinations, winning the prestigious European Best Destination award in 2012, 2014 and 2017 from the European Best Destinations organisation. Meanwhile, international tourist arrivals into Portugal have been growing consistently since 2009, according to the World Travel and Tourism Council.

Porto’s tourism and real estate markets have blossomed over the past five years, running hand in hand with Portugal's economic recovery. However, other factors have been at work.

“Porto has changed a lot since 2015. The city is benefiting from the digital revolution. It’s changing the relationship Porto has with tourism and real estate, in terms of new work opportunities, global markets, new sectors, etc,” says Ricardo Guimarães, director of Confidencial Imobiliário magazine, a Portuguese real estate data provider.

For example, peer-to-peer networks such as Airbnb have been assimilated into Porto, thereby internationalising the city and simplifying the hotel industry for guests and landlords. The ‘digital revolution’ has also coincided with the rapid increase in low-cost flights across Europe, consolidating Porto as a short-stay tourist market.

However, Portugal’s fundamentals also work in Porto's favour: a hot climate, a rich culture, a low cost of living, acclaimed gastronomy, very low crime rates and political stability and economic recovery. Portugal has also benefited from political or social instability in other European or nearby countries, such as Turkey and Tunisia, boosting its appeal to risk-averse tourists and investors alike. 

Record numbers

Porto received 2.8 million overnight stays and 1.4 million visitors between January and November 2017, of which 73% were foreign tourists, according to local IPA InvestPorto.

Considering the city’s small population, Porto saw a higher ratio of tourists to residents than hotspots such as Barcelona and Prague in 2017, according to Porto's Institute for Tourism Planning and Development.

Many parts of Portugal have experienced a downturn in tourism, especially in the south. However, northern Portugal, where Porto is situated, was the only part of the country to witness double-digit growth in 2018, in terms of tourism revenues, rising at more than 11% annually, according to Ricardo Valente, Porto’s minister of economy, tourism and commerce.

“We have a state-of-the-art airport with the ability to grow by more than 60% from the current level. We reached close to 12 million passengers in 2018, and we are easily able to grow to 20 million,” he adds.

The city is very much the gateway to Portugal's northern region as well as the northern and western areas of Spain. Within a two-hour drive of Porto's airport there are four Unesco World Heritage sites and popular Spanish tourist hotspots such as Santiago de Compostela.

Unprecedented price rises

Porto had the highest growth in revenue per available room in Europe in 2018, according to a PwC report.

“We’ve never seen [rental] prices like this in central Porto. Some locals think it’s crazy, a bubble, things must go down. But they’re viewing the market with the same pre-crisis model, before Porto’s tourism boom that is now capitalising its short-term tourism potential”, says Mr Guimarães.

House prices in Porto’s historic centre have more than doubled since 2014, albeit from a low starting point, according to Confidencial Imobiliário’s house price index. For years leading up to 2011, house prices were experiencing negative growth, after which there was a flurry of public spending in the Porto Vivo regeneration programme.

There has been significantly more public and private investment in more recent years in Porto, as shown by the quality of public spaces and cultural programmes on offer in the city, the number of hotels – including luxury accommodation – and Airbnb venues, most of which are new refurbishments, according to Mr Guimarães.

On the other hand, house prices in Porto city as a whole only began recovering in 2016, and at a modest but accelerating pace, according to Confidencial Imobiliário.

What’s hot?

Within Porto’s real estate market, hotels and residential properties have been the main targets for investment, both foreign and local. A lot of foreign investment has gone into regenerating Porto’s historic centre, and many of these buildings are now being utilised as Airbnb lodgings, according to Rui Coutinho, executive director of the Center for Business Innovation at Porto Business School.

In other words, investments in Porto have focused on the rental market, be it for tourists or the 72,000 students in higher education in the city. Indeed, Porto has developed more than 7000 new housing units over the past few years, three-quarters of which are one-bedroom homes, according to Mr Guimarães.

“Tax incentives on urban regeneration in designated regions within the centre of Porto have led, over the past five years, to an attractive environment for local and international investors willing to invest in real estate for short-stay accommodation”, says Peter Holden, group development director at Round Hill Capital, a UK-headquartered global real estate investment and asset management firm that put €100m in a mixed-used regeneration project in Porto in 2018 for student and residential housing.  

Round Hill sees significant opportunities in these sectors due to the persisting supply/demand fundamentals for student housing, as well as much-needed high-quality new homes, adds Mr Holden.

However, Portugal's rental market is facing legal changes that restrict landlords’ powers. “We now have to rent for a minimum length of time of one year. This makes no sense for student residents who might only need nine months. One-year contracts will also be [automatically renewed for three years,] so you might be stuck with your tenant. We feel this is a huge political mistake,” says Mr Valente.

Other opportunities

Although Porto’s city centre still offers plenty of regeneration opportunities, the local government intends to build more projects outside the centre, with private sector assistance – be it affordable housing or public buildings – with the city’s neglected eastern district being a particular area of focus, according to Pedro Baganha, Porto’s minister for urban planning.  

The €100m Round Hill development was one of the most significant foreign investments in Porto in 2018, due to its location and the size of the investment, says Mr Valente.

“It really was a game-changer for how people look at the city. We’ve seen a lot of investment in the centre but no one thought we’d receive a €100m investment outside of [the city centre],” he adds.

Porto’s office space is also in demand. Five years ago, vacancy rates in the central business district were about 20% to 25%, according to Dr Tiago Violas Ferreira, CEO of Violas Ferreira, a Portuguese real estate company. Today they hover around the 3% to 4% mark.

“Over the past two years, we’ve [seen a huge growth in the] development of offices buildings. With a pipeline of more companies coming to the city, we think there is a huge opportunity,” says Mr Valente.

Considering Europe’s ageing population, another opportunity within Porto's real estate market lies in housing for the elderly. The city already has a history of accommodating retired foreign buyers, especially from Scandinavia, many of whom were attracted to Porto by its high-quality healthcare system.

Porto’s popularity is making the city stand out on a global scale. An increasing number of London-based and US firms have invested in Porto since 2016, such as Lone Star and Apollo, as well as wealthy individuals from Brazil, China, Germany, Israel and South Africa, suggesting that the city's appeal to investors still has some distance to go.