Euro-zone

Portugal

Sector fortunes to shift

While the Delta variant has slowed economic activity in other parts of the world, this has not yet been the case in the euro-zone, and we are cautiously optimistic that the bloc will continue to grow. This will support the property market upturn, albeit offices and retail face structural challenges that will limit the rental recovery. Stronger rental prospects for industrial mean we think that the sector has the most scope for yield compression in the near term, though strong demand for prime assets should allow office yields to edge a bit lower too. However, further increases in yields will make some retail assets look increasingly attractive by year-end, prompting small yield falls in the next few years. The upshot is that industrial is expected to outperform over the next couple of years, but stronger capital value growth beyond 2022 will result in retail returns emerging as the strongest.

16 September 2021

Tentative signs of a turning point for property

All-property capital values rose for the third consecutive quarter in Q2, leaving them less than 1% below their pre-virus level. The improvement was driven by a decline in all-property yields, though rents also rose slightly on a quarterly basis for the first time since Q1 2020. The outlook is encouraging for occupier demand and investment in the coming quarters given economic activity is expected to rebound strongly. However, depressed tourist spending and online shopping will drag on the retail recovery. And higher vacancy and more remote working will limit the improvement in the office sector.

18 August 2021

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

16 July 2021
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Drop back in bond yields takes pressure off ECB

The fall in sovereign bond yields over the past week may make things a little easier for the ECB Governing Council when it meets on 10th June. We think it is likely to replace its commitment to make “significantly” higher bond purchases than in Q1 with a less specific commitment to keep financing conditions favourable. Next week we expect to learn that inflation got very close to 2% in May (data on Tuesday) while the final PMIs for May will show a big improvement in Spain and Italy (Thursday). Retail sales data for April (Friday) will probably fall in m/m terms as a lot of shops were closed in France. Finally, note that the Capital Economics London “office” will be closed on Monday.

Virus restrictions weigh on Portugal’s recovery

The re-imposition of some restrictions in late-June is weighing heavily on Portugal’s tourism sector. Along with its unfavourable labour market structure and fragile banking system, this will hold back the recovery of consumption and investment. Portugal’s economy looks set to slump by less than Spain’s this year, but by more than the euro-zone average.

3 August 2020

Is investor interest in Portugal justified?

Despite the deterioration in the rental outlook, attractive property valuations justify investor interest in Portugal, especially compared with its southern European peers.

22 July 2020

Is southern Europe finally embracing e-commerce?

While COVID-19 has forced consumers in southern Europe to shop online, we think that e-commerce penetration will remain lower for structural reasons, which is one reason why prime retail rents in these markets will be more resilient in the long-term.

Portugal’s economy to slow but remain a bright spot

Portugal’s economy has been a relative bright spot in the euro-zone in recent years and we think it will fare better than average again this year. Nonetheless, quarterly GDP growth looks set to slow from Q4’s stellar pace as investment eases and slower European demand weighs on exports.

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