Alternatives: more than emerging, a pressing trend
2022 was a record year for commercial real estate (CRE) in Portugal and Spain with €3 and €15.4 billion in transactions, respectively - an all-time high for Spain and the second best for Portugal.
In Spain, Retail and Offices kept their historical primacy in total investment (representing 45%) but lost ground to L&I , Residential and Alternatives: Retail’s spotlight was basically anchored by the top deal of the year, the “Tree Portfolio” (a buy-back deal of 662 BBVA branches from Merlin) representing 12% of the total deals. Residential, L&I and the Alternative sector - dominated by senior care homes and student housing units - represented a record 41% share in total investment, a significant evolution since pre-covid years, with Alternatives alone representing 13% of total investment.
Q1 2023 started strong for the Spanish residential segment with more than €800 million invested in big deals such as a BTR project acquired by DWS from Culmia and a residential rental project sold by Via Celere to the US investor Greystar. This shows a growing investment trend in BTR or PRS adequately answering to the market’s needs.
Portugal experienced a €3 billion investment volume in 2022 with the Hotels’ sector first in the podium (30%), followed by Offices, L&I, Alternatives and Retail. Paralleling Spain, Offices and Retail are reducing their historical major share in total investments and the top deal of the year was one isolated deal, “Crow Portfolio”, (sale of various hotels from ECS to DK Partners). The Alternatives sector with a 12% weight on total investment volume, included mostly the Health and Senior Care Segments: Domitys Senior Care unit in Vilamoura acquired by Perial and “Project Soul”, two “Luz” Hospitals sold by FSG Saude to the Spanish Healthcare Ativos.
Q1 2023 had maintained interest in the health sector with the sale of CUF Montijo, once again bought by Healthcare Ativos. Retail had the biggest impact though, through the sale of TREI portfolio to LCN (around 62% of Q1 investment volume).
GDP growth in Portugal and Spain is forecasted to be above the average for the EU in 2023 and 2024 but CRE investment transactions will show more subdued markets than in 2022. Despite the active Q1 2023, the future seems gloomy: quality product is scarce, investors are adapting to a new financial framework being more risk averse than ever, price uncertainty is expected to linger throughout 2023, fund raising of institutional investors will likely be less successful and there is more yield adjustment to come. The unstable political and economic setup that arose in 2022 defined the end of cheap money. The financial world is emerging from a period of low returns for bonds, which creates different opportunities in real estate: sustainability criteria are now decisive for investors and tenants.
With the E of ESG being more pressingly addressed, Portugal needs to step-up its offerings of in the residential sector, but student-housing and co-living are prospering, benefitting from digital nomads, expats, companies expanding outside of Lisbon and foreign students looking forward to settling in a sunny and cheap destination. In the short-term, the market will see increased demand for data centres, industries related to agriculture, forest and other natural resources. I&R premises having an increasing number of qualified workers and students, IT and others, along with an adapted green and sustainable L&I sector to support these. The medium-term presents more opportunities on the Social factor of ESG: Spain and Portugal share needs in affordable housing for young people, health and senior care for a growing old population with low economic resources, while offering human, natural and geographical resources and advantages for cleaner energies, innovation and technology. One can hope for a more stable and developed market with real estate investments in asset classes such as hospitals, schools and all kind of infrastructures. Alternatives are expected to give CRE market some fresh air while supporting society.