by Scott Bennett 14th May 2023
The landscape of Portugal’s hospitality and residential tourism market

Portugal’s continued popularity as a holiday destination, despite consolidation, has been reflected in the growth of hotels and hotel resorts since 2017, with record numbers of new hotels coming onto the market in 2022. But is the market now saturated. The British-Portuguese Chamber of Commerce invited the CEO of Norfin, Francisco Sottomayor to shed some light on the matter.

By Essential Business | Posted 1 May, 2023

 

In recent years Portugal has been highly acclaimed in the international media and amongst tourism commentators and influencers worldwide, having received countless distinctions and awards as a tourism destination such as the World Travel Awards ‘Europe’s Leading Destination 2022’.

 

In fact, the weight of tourism on Portugal’s GDP leapt from13% to 15% between 2016 and 2019 – a record year in which almost 28 million visited Portugal. However, with the onset of the Covid-19 pandemic, that figure fell down 10% of GDP in 2021 with fears that the destination had peaked and could return back to numbers seen before the boom years.

 

That fear was unjustified and tourism numbers bounced back in 2022 to achieve almost as high numbers as in 2019 – a year earlier than had been projected by local industry associations and experts.

 

The number of overnight stays by tourists has also increased significantly over the past decade. Between 2011 – the year in which Portugal had to ask the IMF for financial help – and 2018 overnight stays enjoyed a Compound Annual Growth Rate (CAGR) of 5.5%, while in 2018, 2019 and 2022, the number of overnight stays has remained constant at 57-58 million.

 

From 2018 to 2022, the number of beds in Portugal grew at a CAGR of 3.1%, which resulted in a slight decrease in occupancy in 2022 on 2019. Nevertheless, last year the Portuguese hospitality market recovered to pre-pandemic levels, achieving a record year in terms of revenues (Revpar +13% on 2019)) and Average Daily Rate (ADR) across all regions. (Lisbon +8.9%), Algarve +17.5%, Porto and the North +7.7%, Madeira +34%)

 

This encouraging data from Portugal’s National Statistics Institute, which recorded an average national spend in hotels per person of €56.2 per night (+13.8%), had more to do with increased average prices because of inflation (+16.4%) than it did with room take-up rates which actually fell 2.2% or 1.2 points to 54.1% in 2022.

 

Portugal’s tourist distribution

 

Lisbon, Porto and the Algarve are the main epicentres of Portugal’s tourism market, driving most of the sector’s growth, with the Algarve accounting for one-third of national hospitality supply in number of beds, being the only region in which the largest slice of overnight stays are foreign (The UK being Portugal’s biggest market in the region at 27%).

 

However, in terms of growth, the north of Portugal has enjoyed some of the greatest success in recent years with Porto now one of the fastest growing tourist destinations in Europe with average overnight stays and RevPAR at 3.1% and 2.5% in the last three years. RevPAR increased 7.7% or €3.3 on 2019 to a record €46.2, with an average daily spend increase up 13.5% or €11.1, more than compensating a fall in take-up rate of 5.1% (2.7 points) to 49.2%.

 

The Algarve was also the region which most suffered from the effects of the Covid-19 pandemic, with the number of overnight stays dropping by 64% YoY in 2020. Initial forecasts had suggested a full recovery to pre-pandemic levels in 2023-2024, however, the Portuguese hospitality market outperformed expectations with almost a full recovery last year.

 

A challenging environment for tourism investment

 

However, the Covid-19 pandemic, the energy crisis, high construction costs, inflation, high interest rates and the war in Ukraine, all of which combined together to create a perfect storm, have not made the prospects for investment in Portugal’s tourism sector easy.

 

Norfin CEO Francisco Sottomayor predicts the start of a slowdown in revenues, although how far would depend on how economies reacted to inflation.

 

Growth in tourist numbers would also depend on how quickly Portugal’s government decided on a new international airport for the Greater Lisbon Metropolitan Region which would impact on investment in hotels growth from large multinational operators in the market, since greater airport capacity inevitably would mean more tourists and more tourists require more hotels.

 

“I don’t like saying that we are a small market, but the truth is that we are and although there is a lot of capital that wants to enter the Portuguese market, the opportunities are less than they were”, said Francisco Sottomayor, who has been at the helm of Norfin (now part of the Arrow Group), a real estate asset management company with 22 years in the Portuguese market and some €1.5Bn of assets currently under management.

 

Norfin is one of the largest real estate investment managers in Portugal. So far this year it led the acquisition of assets at Herdade da Aroeira (a gated community 30 minutes from Lisbon), while in 2022 it began construction of the Monview apartments development in Miraflores, joined Whitestar in officially launching another apartment development, Antas Green, in Porto, the residential development Lisbon Heights, the new Campo Novo neighbourhood in Lisbon, the Oriente Green Office Campus development also in Lisbon, and announced that it had €500 million to invest in hospitality over five years.

 

Its existing diverse portfolio includes, the Office Park Expo (Campus da Justiça, a complex that serves as a “Justice Centre”) and is a reference on the Iberian Peninsula, and the Prata Living Concept and Metropolis, all in Lisbon.

 

Francisco Sottomayor joined Norfin in March 2020 where he is also responsible for real estate business at Arrow Portugal, after a long and illustrious career in asset, development and project management, which included being Head of Development at CBRE Portugal for 11 years, and director of asset management at Parque Expo, the company that was responsible for the design and implementation of the largest integrated urban regeneration project in Lisbon, today called Parque das Nações.

 

Addressing a group of select business people at the British-Portuguese Chamber of Commerce event in April, Francisco Sottomayor said: “There has been a lot of doubts as to whether the Portuguese market has the capacity to continue to grow at recent rates, but Portugal has remained as and will continue to be a relevant destination, and despite higher air fairs, because of the relatively short times it takes to get to its main European tourist markets.” (Spain, UK, Ireland, Germany, France, Holland and Scandinavia)

 

Boom in new hotels

 

The transaction volume of hotels in the Portuguese hospitality real estate market has been nothing short of staggering over the past years, going from €53 million in 2017 – the year the tourism boom began — to €904 million in 2022.

 

“We have a hospitality market that is very consolidated terms of hotels, 60 of our hotels in Portugal are independent, but from these we will likely see a transfer from individual operators to more professional operators, with a refurbishment and upgrade of the Portugal’s existing hotels,” he said.

 

The most important real estate hospitality transactions were made by international private equity firms, however asset management, insurance, and real estate companies have also been involved in some of the big ticket deals since 2019.

 

Undoubtedly, the biggest deals were Project Crow by the US private equity firm Davidson Kempner involving 18 properties for €850 million, the US asset management firm Invesco with the Tivoli Portfolio for €313 million, the Spanish private equity company Azora which purchased a Pestana hotel building in the Algarve (€307 million), Palminveste real estate company with the Real Hotels portfolio (€300 million), and the US Carlyle private equity company with the Penha Longa Resort, Lisbon (€100 million).

 

Despite the pandemic and economic uncertainly caused by inflation and high interest rates — which led to the postponement and/or rethinking of many hotel projects — hotel openings are expected to add 11,320 keys to the sector with 130 new hotel projects to 2025, of which 37 will be in the Lisbon Metropolitan Area, the big players being SIG – Sani & Ikos Resorts (5), Hyatt (5), Radisson (4), Melia (5), Mercan (3), and Marriott (5), among others.

 

That said the Portuguese hospitality sector is still very fragmented, 84% of hotels are either part of a small family business or a small hotel chain. Portuguese owners control two of the country’s largest hotel groups, Pestana (73 – 5.4% of all hotel beds) and Vila Galé (25 – 1.2% of all hotel beds).

 

Other Portuguese hotel groups in the top 20 that are important in the market include Hoti/Meliá (19 units), SANA (13 units), VIP (12 units), Discovery – DHM (16), Turim (16), Porto Bay (12), Dom Pedro (7), NAU (10), Fénix HF (9), and Luna (13).

 

The Residential and Branded Resorts market

 

Without a doubt one of the markets that has most grown over the past few years is the residential resorts market with sales volume increasing by around 20% in 2022 compared with the same period in 2021.

 

The greater diversification of nationalities in the various destinations coupled with the strengthening of the British in their traditional market of the Algarve can be seen in the context of increased sales of homes in gated resorts, with this 20% growth in units sold translating into one of the highest activity levels seen in this sub-sector since 2017.

 

Albufeira-Loulé and the Atlantic Coast accounted for one-third of sales each, Barlavento and Sotavento also had around 20% each. Regarding average price, Albufeira-Loulé posted average sale prices of €4,625/m2, while Barlavento and the Atlantic Coast registered sales of around €3,000/m2 and €3,800/m2 respectively.

 

But with the end of the Golden Visa programme by which overseas non-EU citizens purchased the right to residency in exchange for a property investment of €500,000 or over, how far will Portugal’s residential resorts be damaged in terms of demand and will the large equity and real estate funds rethink their residential tourism strategies linked to hotels and hotel resorts?

 

Pedro Fontainhas, the CEO of the Portuguese Association of Residential Tourism and Resorts (APR) admitted that it had received calls from clients and investors who had suspended their investments since the government made its announcement on February 16.

 

According to Pedro Fontainhas, the Government had ended the remaining parts of the programme linked to real estate investment that had been left out when the Government terminated it in Lisbon, Porto and along large swathes of the Algarve coast a year before.

 

The resorts industry head points out that tourism units are not the same as housing in urban areas like Lisbon, but rather a parallel real estate offer integrated into a resort offering a number of tourism services and aimed at temporary use for both the Portuguese and foreigners.

 

“Unfortunately, the damage has been done and we don’t understand the arguments as to why the Government would want to end the Golden Visas for tourism. For many hotels, the end of the programme will not have a big impact, but there are many tourist projects that were designed specially to work for hotels with branded residences with the Golden Visa in mind, which is in my view one of the intelligent ways for investors in tourism to qualifying their offer of integrated products” he said.

 

The APR head believes that the Golden Visa offered in exchange for a property within a hotel resort had a positive effect of reducing the demand for temporary homes, and adds that the Government’s measure is senseless because “we’re once again showing the total instability of our legal and tax system which conveys a poor image of Portugal and its government.”

 

It is a concern that Norfin can relate to since one of its new developments is a tourism development close to the beach at Carcavelos, in a branded residences format which will be associated to an international hotel chain, work on which started this year — a project that will not be able to benefit from Portugal’s Golden Visa programme which had already been scrapped along the Estoril/Cascais coast in 2022.

 

Chronic staff shortages

 

Portugal’s tourism sector is vital in terms of employment, employing around 20% of Portugal’s workforce either directly or indirectly.

 

And if traditionally hospitality is badly paid in any country, in Portugal it is particularly poorly paid ranging from €36,293 per annum at the top end and as little as €10,897 at the bottom, depending on region, experience, qualifications and number of years in service.

 

Even more stark is the difference in salaries that men get compared to women with a good salary for men considered €45,407 compared to women’s salaries of €22,431 according to averagesalarysurvey.com

 

Poor pay, coupled with long and unsociable hours, and the high cost of accommodation saw many in the industry who had been laid off during the Covid-19 pandemic use the time to re-skill. The result is that they voted with their feet and left the profession leaving Portugal’s hotels understaffed by around 20,000 and forced to bring in employees from other Portuguese speaking countries to fill the vacancies.

 

It was an issue addressed to the Norfin CEO at the BPCC event, admitting that hiring and keeping qualified staff was an issue while “our workforce doesn’t want to do shift work, so we don’t have any alternative but to recruit staff from overseas”.

 

The second problem for hotels is putting staff up, particularly in out-of-town areas like Comporta in the Alentejo. In the Algarve some hotel chains have resolved the problem by providing accommodation at affordable rent. Either way, providing accommodation is “fundamental for the sector” and Portugal’s sustainability as a tourist destination. “We have had the absurd situation in the Algarve where in August some hotels have had to reserve some of their room stock to accommodate the staff!”

 

The Chinese and US markets

 

Although the Chinese market has had some influence in Lisbon and Porto, Francisco Sottomayor says that Chinese visitor numbers are low and have had a residual impact in the Algarve. “The Chinese market is not really very relevant for us”.

 

On the other hand, the US market, being a large market with a high spend per head, has potential to have a big impact in Lisbon, Porto and other regions too.”

 

The Norfin CEO noted the remarkable increase in US tourists to Portugal which was extremely relevant and had practically been non-existent a few years ago. For example, according to the Portuguese tourist board Turismo de Portugal, between January 2022 and November 2023 overnight stays from US holidaymakers in Portugal posted a growth of 353% while the number of guests increased 360% to 1.1 million tourists. (200,000 more than in 2019)

 

Americans, he said, primarily were motivated by short stays in several countries to discover Europe, but the potential of the American market for Portugal’s tourism sector was huge. “The Americans tend to go where there are US hotel chains and I think the fact that large chains are moving into or expanding in Portugal (Sheraton, Marriott and Hilton) is a sign the recognise this.

 

Of course, part of this success has to with the work on marketing campaigns and investment the Portuguese tourist department has made in the US market, and which had been tremendously successful, but had also been the fruit of public-private cooperation between Turismo de Portugal, the airlines such as TAP, and the large hotel groups.

 

“There is also something in Portugal too that reminds the Americans in their collective memory of how Florida and California were in the 1950s and 1960s and which they can identify with, particularly in the seniors market. It might be a very small part of the market, but given the sheer size of the US market, a small part is significant for Portugal”, he concluded.