It’s not San Francisco – but it has a bridge and a tech sector to match. Portugal’s capital is starting its post-recession climb up the world rankings of places to live, work and invest. Emily Wright travelled to Lisbon to find out why the city is giving its North American counterpart a run for its money
It is just so iconic, that soaring, rust-red suspension bridge. Arching out over the water, fading into the near distance on a cloudy day, synonymous with one of the most creative, entrepreneurial cities in the world. It is a landmark sight most people would know anywhere.
Or would they? Because, despite a resemblance verging on the identical, this is not the Golden Gate Bridge. It is not in San Francisco. It is not even in North America.
Welcome to Lisbon. Historic, quaint and ramshackle, this city is everything its stateside counterpart is not. But counterparts they are – and not just because of a strikingly similar taste in overpass design. Rock-bottom rents, residential tax breaks and the rise of coffee-fuelled start-up districts has earned the Portuguese capital the moniker “the California of Europe”.
And now the big guns are moving in. Rohan Silva’s Second Home will open its first overseas outpost in the city next month and Web Summit, one of the world’s biggest and best-known technology conferences, held in Dublin since its launch in 2010, will move to Lisbon in November.
The city’s tech scene is just the tip of the iceberg. After years in the financial doldrums following the global recession, cheap rents across the board and the city’s new-found “next big thing” status have fuelled record levels of investment into commercial real estate over the past 18 months. An 130% increase in volume from 2014 to 2015 pushed the total to €2bn (£1.7bn) last year – 95% of which was overseas money.
With similar numbers expected this year and a host of tax breaks for overseas buyers on residential property, the great Lisbon love-in shows no signs of a slowdown.
“Think Barcelona 25 years ago,” says David Rosen, founder of specialist agent Pilcher Hershman. “That’s where Lisbon is now. With the potential to become just as big.”
But just how sustainable is the city’s rapid, almost frenzied, exponential growth? And with such a high proportion of UK buyers traditionally investing in Portuguese property, can this emerging tech mecca withstand the potential repercussions of Brexit?
Climbing from the wreckage
This is the story of how one city is driving the recovery of a country left decimated and bankrupt following the worldwide financial crisis. And it is a recovery that is being bankrolled almost entirely by foreign investors desperate to get in on the act before prices start to climb back towards pre-2007 levels. They are currently at around €18 per sq m a month for office space and €2,500 per sq m for residential.
Research by local agent Worx reveals that in 2015, more than half of Lisbon’s overseas investment was from the US as the likes of Blackstone and Lonestar made big plays in the city.
And it couldn’t have come at a better time. “We are a bankrupt country. There is no money here in Portugal,” laughs Pedro Valente, head of capital markets at Worx. “No money in sight. Our banks are all in huge trouble. But that makes us very cheap. Lisbon is the place to be right now. That is, in part, because it’s a great city. But really it’s because it is a cheap city. And we are selling to the Chinese, the Thais and the Americans.”
“Investment here is at an all-time high,” adds Nuno Nunes, head of capital markets at CBRE Lisbon. “We transacted €1bn in the first half of this year alone, which is amazing for Portugal. Investors are from America but also the Middle East, Israel, the Nordics, a lot from Brazil. The Mexicans and the Chileans are looking too.”
“People are talking now,” says Arthur Moreno, co-founder of Lisbon-based developer Stone Capital. “Suddenly the city is fashionable. And as more people look to invest, the more expensive it will become.”
Afforda
ble tech space
In the meantime, affordability is also driving the emergence of the city’s tech scene. TMT occupiers accounted for the largest proportion of office take-up in Lisbon last year, 26.3%, compared with financial services at 14.6%.
Although this burgeoning tech sector is expected to continue to grow – particularly following the arrival of Second Home next month – the city is still seen as having a fledgling, rather than a mature, tech market. But it is one that is well served for talent.
“We have a lot of skilled, unemployed people here as a result of the last crash,” says Valente. “They have been setting up their own companies, so it’s a great city for tech firms to start. The city is like a big incubator.”
“It is not a Berlin or a Tel Aviv yet,” adds James Townsend, co-founder of London-based Kontor. “But something is happening in Lisbon and we will be out there later this year to explore further.
“The start-up ecosystem seems to have support from the government – set-ups such as Beta-i have helped push forward accelerator programmes including Lisbon Challenge. Not to mention the climate. Weather-wise it is great. And it is so well located, on the Atlantic and an easy, cheap base to travel to and from in Europe.”
Start-up hubs such as the LX Factory – circa 250,000 sq ft of warehouse space weaving through cobbled streets under the Golden Gate-esque 25 Abril Bridge – are also cementing Lisbon’s position as a tech pioneer. The spaces are simple, no frills and achingly trendy (see box, p70).
Needed: offices
Beyond the tech scene, there is a dire need for office space in the city. Without it, rents will start to rise. In 2007 the office vacancy rate was 30%. Now it is at 3%. “We are still catching up following the crash, so there is no new stock,” says Worx’s Ricardo Quaresma. “Rents are rising because no one is building. There is stock available but it is not qualified, which means it is now difficult to find new, high-quality office space in the centre of Lisbon.”
Bad news for long-term bargains but good for anyone who has already taken the plunge, or even just about to. “In terms of returns, we are seeing investors buying up buildings where the rents were smashed by the crisis,” says Valente. “And because of the low level of stock, they will see the rents increase quickly.”
Ease of citizenship
And since 2013, two major schemes have been making life far easier for foreigners to buy homes in Portugal: the Golden Visa – citizenship and residence in the country for an investment of at least €500,000 – and the non-habitual residence tax.
The former has been particularly popular with Chinese and Brazilian buyers. In 2015, 573 visas were granted to Chines buyers – who make up 87% of all applications
The NHR tax is luring fresh investment from France, Germany, the Nordics and the UK. “The NHR allows you to become a fiscal resident in Portugal whenever you want,” says Frederico Mendoça, CBRE’s head of residential in Lisbon. “The only rule is that you need to own property and live here for six months and one day a year. If you do that, then Portugal gives a 10-year exemption on any taxes on most incomes and, if you earn over a certain amount, you will pay only 20%. If you are retired? Again, no tax on savings for 10 years. This has been particularly attractive to the French.
“Of the 120,000 deals in Portugal a year, 80% of those are residential with around 22% made up of overseas money. UK buyers used to be the most active here but since 2013 that has changed. Now, of that 22%, 26% are French, 20% are Brits, 15% Chinese and 9% Brazilian.”
And what about the Brexit vote? Once the most active buyers of Portuguese residential property, especially in Lisbon, Britons have long been a crucial part of the country’s economy. How will that play out post-Brexit?
Though Portuguese agents and developers are surprised and saddened by the referendum result – “It’s like you have told us it’s over and we are still desperately in love,” says CBRE’s Nunes – the impact is more likely to be felt in the UK.
“We are still learning how to think after Brexit,” says CBRE’s Mendoça “We are trying to measure the impact. It is more expensive for Brits to invest here now because of the weak pound. We have seen several scenarios where buyers have wanted to extend conditions to see if they could get a better exchange rate. And I can see why. Properties are 20-30% more expensive. That’s up on the average spend by British buyers here of €200,000.”
While the full effect of Brexit is still yet to be quantified, Mendoça adds that the influx of overseas cash since 2013 from other counties, particularly France, will lessen the blow. That and the fact that with Portuguese property still so cheap by comparison, local agents don’t see a price rise putting off the British investors on a grand scale. “We still haven’t reached the peak on investment here,” says Nunes. “There is some way to go. We can never predict the future. And it always has a way of surprising us.”
From pariah to prince
Indeed, just three years ago Lisbon was battling “a pariah-like status”. Investment had slowed to a trickle of just €53m a year. Now it is the California of Europe. And not just because of a strikingly similar taste in overpass design.
LX factory: a world-famous tech haven rises from a stalled urban regen project
It was going to be one of the biggest urban regeneration schemes that Lisbon had ever seen.
It would involve around 250,000 sq ft of warehouse space in the heart of the Portuguese capital that, 11 years ago, was set to be transformed into a vast, sprawling mixed-use development. It was going to be legendary.
Now, after more than a decade of stalling, planning issues and delays, only a fraction of the allocated space – 43,000 sq ft – will be used for the development. And it is the best news the city could have hoped for.
Because what is there instead, partially by accident, is legendary in its own right. This is the topsy-turvy story of the bureaucratic nightmare that turned into a fairy tale for the tech era. A rags-to-rags saga that was initially considered a temporary solution to a financial problem has become a long-term jewel in Lisbon’s crown. Welcome to the LX Factory.
“We are 100% occupied,” says Filipa Baptista of Mainside Investments, the funding vehicle behind the scheme as she strolls through an independent coffee shop/pancake house/gallery/vegan shoe factory – one of the many that line the cobbled streets weaving through the warehouse spaces.
“It’s around €11 [£9.24] a sq m per month here and we started to rent out the space on temporary leases to act as a stopgap while the urban regeneration scheme was delayed.
“It was never meant to be a permanent measure. Now, though? It will stay. And we have shrunk the scheme instead.”
And stay it should. A quiet influx of start-ups, tech companies, independent food stores, galleries, coffee shops, furniture stores, co-working spaces and artists over the years has created one of the world’s most organically grown, innovative start-up hubs.
This is not something that has emerged over the past two years. This has been building slowly for nearly 11 years.
And it shows. The hub feels like a district in its own right. It has its own roads, its own vine-covered al fresco bars, its own tumble-down cantinas.
It’s real, it’s buzzing and the rest of the world is starting to notice.
From Kontor in London, through to start-ups from America, Australia, Brazil, China and the rest of Europe, all are eyeing this former printing factory with interest. “10 years ago, almost everyone here was Portuguese,” says Fernando Mendes, founder of Co-work Lisboa, which operates on the top floor of one of the LX Factory warehouses. “Now 30% of my clients are international, from all corners of the world.”
What is so interesting about the story of the LX Factory is that it encapsulates a period of time of fast-changing real estate demand. As TMT occupiers outpace other sectors in terms of uptake in major cities around the world, this hub is proof that shiny new mixed-use developments may no longer attract the best occupiers, the best investment and recognition
on a global scale.
But a coffee shop/pancake house/gallery/vegan shoe factory? Well, that might just be what clinches it…
Reformers and pragmatists help Lisbon pull in the investors
Eric van Leuven, head of Portugal, Cushman & Wakefield
After some years of pariah status, Lisbon is firmly back on the radar screen of the international investment community.
Indeed, 2015 investment transaction volumes of around €2m were almost double those of the 2007 pre-crisis peak.
This improvement came about as the result of a combination of investor-friendly legislative changes, more available stock at attractive pricing, and the “comfort” factor.
One of the structural reforms imposed by the troika of lenders, in the context of the financial assistance programme to which Portugal was subjected between 2011 and 2014, was a major overhaul of the outdated landlord and tenant legislation.
This eliminated tenants’ virtual perpetual security of tenure, bringing “old rents” in line with market, and allowing the eviction of tenants in the case of major maintenance works.
This in turn resulted in a wave of hyperactivity in the refurbishment of the city centre, which had been neglected by impoverished landlords for decades.
The other driving factor behind the high investment volumes was an increased, if belated, sense of pragmatism among property owners.
The banks badly needed to deleverage in order to shore up their balance sheets, while other property owners realised that clinging on to trophy assets was either uneconomic or plainly foolish. Properties became available in large quantities, attracting hordes of cash-rich buyers from the global marketplace, led by the usual suspects from the US, which was responsible for around 50% of total investment volume, in addition to the traditional European institutions, as well as family offices from the Netherlands, Spain and France, but also from China, Singapore and Brazil.
Last, but not least, over recent years Lisbon has become a vibrant, cosmopolitan and highly liveable city, a very popular weekend break and conference destination and, increasingly, an attractive location for a second or even first home for foreign buyers who value not only the weather but also the safe and friendly environment.
I, for one, after almost 35 years here, still think that this is one of the best cities in which to live.
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