Portugal Property Development Rebounds in Q3

Explore how Portugal's property development sector is revitalizing in Q3 2024, fueled by lower interest rates and a wave of positive sentiment.

In the third quarter of 2024, the property development sector in Portugal has exhibited a noteworthy resurgence, emerging from the shadows of a tumultuous period characterized by escalating interest rates and rampant inflation. For the first time since the waning days of 2022, both demand and sales have experienced a marked uptick, heralding a promising shift in market dynamics. The sentiment indicator has ascended to +5 percentage points (p.p.), a remarkable recovery from the dismal -70 p.p. recorded during the corresponding period in 2023.

This revitalization in demand has concomitantly precipitated an increase in property prices, with the price sentiment indicator soaring to +35 p.p., the zenith since mid-2022. Notably, despite the adversities faced in preceding years—where rising interest rates effectively stymied price growth—property prices have remarkably remained resilient, never dipping into negative territory. By the close of 2023, the price sentiment lingered at +3 p.p., indicative of stagnation. However, the resurgence of demand has catalyzed an overall improvement in market sentiment, propelling the indicator to +20 p.p., the highest watermark since the inception of this market cycle.

The Expectations Indicator, which serves as a barometer for developers' future projections regarding sales and prices, has surged to +36 p.p., marking one of the most optimistic figures in the annals of the Portuguese Investment Property Survey. This surge in optimism mirrors the buoyant sentiments observed during the post-pandemic recovery phase spanning 2021 to early 2022, where robust future expectations propelled both sales and price growth.

A pivotal factor driving this renewed momentum is the anticipated decline in interest rates. By the conclusion of 2023, expectations for expedited rate cuts had spurred a resurgence in land demand, which had initially waned following the European Central Bank's (ECB) postponement of its decision. However, with interest rates now clearly trending downward, land demand has rebounded significantly in the third quarter of 2024. The proportion of agents reporting high or very high demand for land has escalated from 41% in the preceding quarter to an impressive 50%.

Despite this overall optimistic outlook, the focus of new property projects remains predominantly on new construction, with a staggering 80% of the market oriented towards such ventures. However, a substantial segment of these developments—approximately 75%—is targeted at international buyers, leaving a mere 25% aimed at domestic demand. This persistent imbalance has been exacerbated in recent years, as local buyers grapple with the challenge of affording the inflated prices.

In stark contrast to the recovery observed in property development, the Build-to-Rent sector continues to languish, with its index plummeting to -26%, the lowest level recorded in the past 18 months. Only the -52% noted following the announcement of the "Mais Habitação" package was more disheartening. The challenges besetting the Build-to-Rent sector are largely attributable to surging construction costs and apprehensions regarding profitability amid a volatile interest rate landscape. Furthermore, the development of affordable housing remains constrained by the specter of rising construction costs. Despite the prevailing positive sentiment in the broader market, developers exhibit caution towards large-scale affordable housing initiatives, wary of the financial risks involved.

While Portugal's property development sector appears to be charting a course towards recovery, buoyed by declining interest rates and a resurgence in demand, significant challenges persist within the Build-to-Rent and affordable housing markets. Rising costs and constrained profitability continue to pose formidable obstacles to growth in these critical areas.