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João Diogo Cristina
Country Head Portugal
Merlin Properties

20 January 2022

Merlin Properties is a real estate company listed on the Spanish and Portuguese Stock Exchanges, focused on the acquisition and management of commercial assets in the office, retail and logistics sectors.

What does Merlin's footprint look like in Portugal at the moment and what is your vision for the company here?

In Portugal, Merlin is invested in all three sectors, namely offices, logistics warehouses and also in commercial and retail assets, such as the Almada shopping center in Lisbon. We currently have over EUR 1 billion spread across 11 assets, and the footprint is divided between 120,000 square meters of offices, 60,000 square meters of retail space and (potentially) 250,000 square meters in logistics warehouse units in the North of Lisbon. Our strategy is to expand our portfolio in Portugal through investing in data centers and by acquiring some high potential properties. We might as well consider going into development.

Since we see ourselves as a full-fledged Iberian company, we wanted to get listed both on the Portuguese and the Spanish stock exchange markets. We are a Core / Core-Plus investor.

Being so heavily invested in the office and retail segments, how have you managed to cope with the changes the pandemic brought upon them?

We offered discounts to our retail clients to help them surpass the losses caused by the pandemic and rolled out a "commercial policy" that featured rental discounts. In the offices sector we were relatively insulated since we have managed to anticipate lease negotiations and increased the duration of our leases beforehand. Right now, we are fully occupied.

In terms of financing, we get it at a corporate level. As a result, for us the market is fluid enough and we have not faced any financing related issues. Even looking at the market at large, the banking and the mortgage sectors proved to be willing to finance real estate projects.

What lessons from Spain’s successful REIT regime can Portugal learn and wherein do you believe lies the opportunity for Portugal in this space?

The REIT regime in Spain is extremely streamlined, with less rigid requirements for investors and an established model. However, in Portugal, we're still in an incipient stage and some rules need to become more lenient in order to make the regime fully operational. The fact that withholding taxes are not fine-tuned points toward a system with inefficient measures that jeopardize the idea of a transparent fiscal system.

Fortunately, we are sensing willingness to solve these issues coming from the national authorities.


A strong REIT system would definitely provide more liquidity to a small market like Portugal and would give a big push to the lack of supply we are now facing especially in the offices, residential and logistics sectors.


Is the shortage in supply the rationale behind Merlin moving into development?

Indeed, we are open to take some development risk in part due to the shortage in assets, and also because a development venture makes sense from a risk adjusted return basis. Since asset prices have gone up dramatically and returns are relatively low, we need to get more than the typical 4,5%-5% yields if we want to remunerate our capital accordingly.

What are the main challenges investors and developers are currently facing in Portugal, from your perspective?

Licensing is the underlying problem here, and probably the main constraint of the supply chain. The judicial system should act more swiftly when giving court decisions and the taxes would need to be lower for the economy to flourish. The corporate income tax in Portugal is one of the highest in Europe - between 22.5% and 31.5% depending on the company's profits. The VAT rate is also very high at 23%.

Where do you see most potential coming from in the future: rehabilitated stock or new developments?

Honestly, I think there's room for both, because there's a chronic lack of supply of office space on the Lisbon market. Tenants are more than happy to rent out premium refurbished buildings. There's not much land available so it's nearly impossible to build new office spaces in the city center. Most works are reconversions from offices into residential or hotels, so that increases the pressure on rental prices. In Portugal, the market is small but competitive and you have to stay on top of the game. We recently refurbished our Monumental office building in the heart of Lisbon. We replaced the facade, baring it to the bone and remaking everything from zero (HVAC, lifts, wiring, etc.) and turning it into a most successful mixed-use space. 

Which are the main factors attracting various business segments to Lisbon and do you believe Porto will become a similarly successful office hub?

The reason why the office market has seen such an impressive growth in the past five years in Lisbon has to do with the number of business process outsourcing (BPO) companies which landed in this market. The costs of both property and workforce are appealing in Portugal, from which they can serve a wider market. And there also are big companies like Microsoft or Google that decided to concentrate some of their departments (IT, invoicing, etc.) here.

Merlin is concentrated in Lisbon because of our Core investment approach, but we would consider Porto a viable option once this market fully stabilizes and consolidates. It has great universities that are a melting pot of human resources, and excellent accessibility and infrastructure. When the market is consolidated enough, we will make a move.

What are the plans that you want to pursue at Merlin in the next two to three years?

We want to capitalize on our existing landbank and keep diversifying our portfolio. The plan is to become the dominant presence in the Iberian Peninsula in the offices, logistics and retail sectors.


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