Portugal’s $9 Million Villas Draw Investors to Crisis: Mortgages

At “The Keys,” a cluster of luxury villas on the Atlantic coast modelled on Miami’s palm-tree resorts, builders and gardeners are busy trying to finish before the summer tourist season.

The $300 million investment is on the other side of the ocean from Florida, at Quinta do Lago in the Algarve region of Portugal, a country more synonymous of late with economic collapse than new real-estate projects. The villas are on sale for as much as 7 million euros ($9 million) each and a quarter have buyers, according to the developer, U.K.-based E3 Property.

“The recession was very strong, but based on our sales in Portugal, we now feel there’s a strengthening of the prime property market,” said Mark Lenherr, who runs the company.

Sun, sand and golf have long attracted tourists to Portugal, with the Algarve accounting for one in three visitors. As property prices fall after the overbuilding of hotels and resorts that never filled up, investors are now picking over the debris from Europe’s financial crisis, including funds acquiring soured commercial mortgages from banks and a Saudi sheikh returning to the market.

While investment in Portuguese real estate is still down more than 50 percent from the 2007 peak, it rose 68 percent to 424.5 million euros in 2012, according to data compiled by realtor Cushman & Wakefield Inc. Three-quarters of the investment was in residential property, boosted by banks selling non-performing loans to funds, said Luis Rocha Antunes, the firm’s director of investment in Lisbon.

Saudi Sheikh

“While we remain cautious about the real estate market amid a weak economy in Portugal, we expect investment volumes to increase this year,” Antunes said.

Saudi Sheikh Mohamed bin Issa al Jaber is looking at four-and five-star hotels in Portugal, he said while visiting the country this month. Al Jaber, Saudi Arabia’s third-richest man based on data compiled by Bloomberg’s Billionaires Index, may sell some budget hotels that are no longer part of the strategy of his company, JJW Hotels & Resorts Ltd. He declined to say which assets he may sell or buy.

“Where there are difficulties there will always be opportunities,” Al Jaber said by telephone.

MBI International & Partners Inc., the holding company founded by Al Jaber that controls JJW Hotels, bought three resorts in the Algarve in 2008 from Starwood Hotels & Resorts Worldwide Inc. for $268 million. In February, he repaid all his mortgage debt to Portuguese banks.

Carlton Group

Clients of the Carlton Group Inc., a U.S. real-estate investment bank, set aside 7.5 billion euros for purchases in Spain and Portugal over the next 12 to 18 months as the risk of a euro break-up diminishes and prices adjust to what buyers expect to pay, said Javier Beltran, who’s in charge of Carlton’s Iberian operation.

“Since the beginning of this year, the prospects for Portugal’s real estate market have started to improve,” Beltran said, whose group is looking to buy luxury hotels with occupancy rates that exceed 65 percent.

Property prices declined for a second straight year in 2012, losing 2.2 percent, according to Confidencial Imobiliario, a company that collects data on the Portuguese real estate market. For some assets, such as residential and retail space, prices will decline another 10 percent to 15 percent before recovering in early 2014, according to Beltran.

Values since 2008, though, are little changed, down 1.6 percent, Confidencial Imobiliario figures show. Unlike in neighboring Spain, the market experienced no boom and bust, said Antonio Souto, a board member at Banco Espirito Santo SA, Portugal’s biggest publicly traded bank.

No Bubble

“Portugal never had a real estate bubble, prices were always moderate,” said Souto. “Let’s say now there is a certain stabilization, but no improvement yet.”

Portugal was the third euro member to seek an emergency bailout when it secured 78 billion euros in May 2011 following Greece and Ireland. The economy is in its third year of recession and unemployment is the highest since at least 1998.

Less than 30 miles west of the Quinta do Lago, ghost resorts and half-finished apartments in the once-bustling tourist town of Albufeira illustrate Portugal’s recent past.

At the 450 million-euro Herdade dos Salgados Resort, a sign on a fence blocking the entrance to the main hotel states that “the building company has exercised the right to retain this property.” Leaves wither on the palm trees that surround the two vacant hotels, apartments and empty swimming pools. It had opened a month before Portugal requested its bailout.

White Elephants

“Have you heard of a white elephant?” William Blair, a 60-year-old Canadian, asked as he walked with his wife near the beach alongside the Herdade dos Salgados on Feb. 18. “This is like looking at four white elephants.”

At another complex in Albufeira, two stray dogs run around a half-empty swimming pool. The 96 units have remained unfilled since they were completed in 2008.

“All these blocks have been empty for years,” said Oliver Michel, a security guard standing outside. “I’m here alone all day. It’s actually quite sad.”

A few feet below, more than 50 unfinished red brick apartment buildings lead down to a half-empty marina. The site has been empty since the construction workers downed tools two years ago, said Jose Carlos Rolo, the president of Albufeira. He estimates more than 1 billion euros was lost on now-zombie real estate projects in Albufeira during the last three years.

“Neither the politicians, nor the banks, nor the building companies foresaw such a crisis,” Rolo said on Feb. 18.

‘Lots of Cash’

As The Keys project, which is costing 230 million euros, moves toward completion by June, investors are also looking at the ghost resorts, betting that the tourism industry is in recovery.

“The type of investors in the prime property market aren’t affected by the economic cycle,” Lenherr, 46, of E3, which also has operations in the Caribbean and Southern Europe, said on Feb. 25 “We’re talking about captains of industry, heads of banks and funds with lots of cash available.”

The Herdade dos Salgados Resort is scheduled to reopen this year after ECS Capital, a Lisbon-based private equity fund, acquired its loans from Portuguese banks and took over management, said an ECS spokesman, who asked not to be identified, citing company policy.

Banco Espirito Santo was among the banks that sold the loans to the ECS fund, said Souto, the board member. He declined to say how much debt from real estate developers the bank sold in the same manner.

“This is an experience that’s working well,” he said. “Some of these companies would otherwise end up insolvent and thousands of jobs and value would be lost.”

Hotel Factory

The tourism and real estate market’s recovery is crucial for Portugal’s economy, which the government projects will return to growth next year, after shrinking an estimated 1 percent in 2013 and 3.2 percent in 2012.

Tourism accounts for about 10 percent of the gross domestic product, compared with 17 percent in Greece. In the Algarve, about eight in 10 jobs are in the tourism industry. Unemployment in the region reached 17.9 percent last year, the highest level in all of Portugal.

The number of hotels in Portugal almost doubled to 992 in the past decade, according to Portugal’s National Statistics Institute. The occupancy rate, the proportion of beds booked, fell to 41.3 percent in 2012 from 42.8 percent the previous year, according to data compiled by the Tourism Office. In 2002, the rate was 49.7 percent.

“If the hotel business was a factory, more than 50 percent of its output wouldn’t make it out of the plant,” Frederico Costa, the head of Portugal’s Tourism Office, said in an interview on Feb. 14. “The problem with some of the existing hotels is that they simply had too much debt.”

Room Bookings

At the top end of the market in the Algarve, demand from customers is picking up, said Joachim Hartl, the director of the Conrad Algarve Hotel in Quinta do Lago that opened in September.

The occupancy rate for five-star hotels in Portugal rose 2.7 percentage points in 2012 to 54.9 percent, while all other hotel categories saw occupancy rates decline, according to data compiled by the Tourism Office.

The parking lot of the 200 million-euro Conrad, part of the Hilton chain owned by Blackstone Group LP, had a handful of Porsches, BMWs and Mercedes-Benz cars. Some belonged to second-home-owners in the Quinta do Lago spending time at the hotel’s Spa and Health Club or steak and seafood restaurant.

Luxury Niche

Guests at the 154-room hotel built in the form of an 18th century Portuguese palace pay as much as 4,000 euros a night to stay in the Rose Garden suite in the off-season, rising to about 4,450 euros later in the year, said Hartl.

“Is the destination under a lot of price pressure? Yes it is,” Hartl said. “That’s why I believe there is even more of an opportunity to come up with a luxury property because there’s a niche for that and we’re really carving out a new market.”

The Keys is firmly in that niche. Workers are completing the last set of houses with swimming pools alongside an artificial lake. A gardener waters the lawn of one of the 72 properties, which have names such as “The Bel Air” or “The Melrose.” The sales brochure says the development is taken from the “elegant modernism of Miami and the luster of Hollywood.”

“Gone are the days of the buying and selling frenzy,” said Alison Buechner Hojbjerg, an agent at Quinta Properties who’s involved in selling villas at The Keys. “Buyers now are on the lookout for the best plots at the best prices.”

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