Client: Cushman & Wakefield
Optimistic on Investment
It’s was a tough 2011 for real estate consultants like Cushman & Wakefield. They made up for the downturn in property transactions with non-transacctional services.
Cushman & Wakefield admit that 2011 was a difficult transactional year in all four areas of their business: office; retail; industrial and investment. “We had a really decent 2010, so 2011 was difficult after such as good year,” admits senior partner Eric van Leuven, who believes that the investment and transactional market will begin to pick up this year.
“The big property owners, particularly banks, are seeing that they need help, and that they must be more flexible in what they can expect from their portfolios. I see more realism in the market and an acceptance they need outside expertise which they didn’t when the market was buoyant,” he says, adding that the advantage of selling bank assets is that banks are generally willing to stump up finance.
On the real estate buying side, Cushman & Wakefield is seeing a new breed of investors focused on the big German firms and some of the big British, Dutch and Spanish property companies.Families like the Ortegas and Champalimaud. “We’re seeing investments in prime high street real estate, particularly in Central Europe, and I’m trying to convince these investors that if they like that sort of product, then they can find it better and cheaper here in Portugal,” says Eric van Leuven.
Eric van Leuven believes that high street interest will continue now that the shopping centre sector is mature. “I have always been a great promoter of high streets, although for 20 years we thought there was more money to be made in shopping centres. You only have to look at the great weather we have in Portugal to understand that the whole environment of high street shopping is much more pleasant,” he adds.
The problem is finding the right sized site in prime locations. “If you look at Rua Augusta, which used to be the prime shopping street in Portugal, the shops and the buildings are too small and that’s a problem for many retailers. What we’re seeing is a shift, with prime retail coming to Avenida da Liberdade and Chiado and moving away from the Baixa where you just can’t find the right size and configuration,” says Eric van Leuven who points out that the maximum floor plates in the Baixa are only between 65m² and 85m², whereas in Liberdade they range from 200m² and 300² to 400m².
Business in the high street is really motoring, partly thanks to tourism, and will do so even more with the new Easy Jet hub, all of which is “very positive,” he says. An obstacle to street retail is still Portugal’s outdated rental laws which are currently being debated. “It’s morally incorrect to expect landlords to subsidise tenants. Any changes are welcome, and obviously the reform of the rental law is very positive,” agrees Eric van Leuven.
For Cushman & Wakefield the office market is tough, with shockingly low net rents and headline rents coming down. “All owners want to keep their headline rents because that’s how a building is valued, but if you look at the short-term benefits that landlords are willing to give in rent-free periods and fit-out contributions, the net effect is low rents,” admits Eric van Leuven, explaining that some areas with higher vacancy rates, like Parque das Nações, are suffering more than prime areas with low vacancy rates like Liberdade.
“It’s not easy to see where new demand will come from. I think a couple of years ago we were expecting some large government bodies and utility companies to relocate. There had been a very ambitious programme for a British Telecom city, while EDP will be relocating, but they are building their own premises, “he points out.
The big issue for Eric van Leuven is the tax situation. “VAT is very high, which obviously impacts on consumption and retail sales. But its VAT on commercial property and the rules surrounding that are problematic, according to Eric van Leuven. The rule of thumb is there is no VAT on real estate. That means that the developer builds the building and basically offsets the VAT on construction, on fees for architects and agents. A developer can elect to not be examined for VAT, which means that at the end of the development process he gets the VAT back that he’s paid to the contractors and service providers provided that the future tenants of the building are VAT liable. A simple principle. But because some operators found loopholes to avoid giving back VAT, the previous government established new penalising rules. One is that if a property is empty for more than two years, i.e. the developer or owner hasn’t been paying anything to the Government because there’s nothing to charge VAT on; he has to refund the VAT which he received or offset. “That’s a major issue...particularly with big German investors investing in office parks where there is a lot of vacancy. Having to return one or two million euros in VAT isn’t funny,” he points out.
Another rule is that you can’t sub lease because the owner looses the right to claim back VAT, so it’s very inflexible. The tough rules stem from abuses and, but they are unreasonable. “Investors that have invested in Portugal and have been subjected to these rules will never ever come back and will tell their friends not to ever come here! It sends out a message that Portugal’s tax authorities are complicated and unreasonable. It’s not a fair ruling,” he says.
INDUSTRIAL AND LOGISTICS
While the market in 2011 was fairly sluggish, Cushman & Wakefield sees a positive development in the potential of the port of Sines. The enlargement of the Panama Canal will mean that Sines will become the first point of entry into Europe from Asia and the government’s commitment to the high-speed rail link for freight means that goods can be moved quickly to any point in Europe. “Portugal, although admittedly not in the centre of Europe could enter another league and become like the Rotterdam of southern Europe,” says Eric van Leuven who says that overall the logistics market is likely to focus on consolidation, modernisation and upgrading rather than expansion.
NON-TRANSACTIONAL SERVICESOne area the company did well was in the non-transactional and services sector which Eric van Leuven says was a “real success story”.
All text and photos kindly supplied by BPCC Member: