The Ascensor da Bica struggles up the Calçada de Bica Grande like a weary carthorse. Inside the yellow tram are tourists – some Germans, but mostly British – packed together like a tin of Lisbon’s famous sardines. If they reach out of the windows for a photograph, they’ll be able to see the grand view of the city’s harbour receding in the distance, and above them apartment buildings, painted the colours of summer. The paint is peeling though, and there’s little room to turn around and grab a photograph.

Lisbon’s tram network was founded in 1873, when the carriages were actually pulled along by horses. It was designed for a city in decline. By the time the tram network reached its greatest extent in 1959, Lisbon was a backwater city. That year saw the opening of Lisbon Metro, after which the number of passengers stepping aboard these cramped yellow cans began to ebb.

Tourists, however, can be found clinging onto the hanging straps of the trams in plentiful numbers, disregarding guidebook warnings about pickpockets. The past decade has seen an explosion in tourists across Portugal, with growth at its most pronounced in Lisbon and the country’s second city, Porto. According to Gustavo Castro, an analyst at Colliers, the reason is simple.

“I will tell you that in Porto, it started more or less 15 years ago,” says Castro. “Growth was essentially driven by lowcost carriers, especially Ryanair. They started to include Porto in their European routes, and soon enough, tourists started to arrive at a fast pace.”

The lure of flight prices in the double digits soon began to boost the capital’s prospects. “Lisbon always had a terrific appeal,” says Castro. A rise in tourist numbers followed on a little after Porto’s boom. “People started to combine Porto and Lisbon, which drove Lisbon upwards. Suddenly, the capital was driving tourists on its own.”

It helped that Lisbon was in easy reach of more conventional holiday destinations at the time: the Algarve, where hotel growth in Portugal was traditionally concentrated, as well as the former royal mountain retreat of Sintra and the beaches of Cascais. As the country’s largest city, says Castro, it also benefitted from having “more carriers and more flight routes”, which naturally brought more people. According to a Collier’s report on hotel growth in Lisbon and Porto in 2017, passenger traffic increased by 22.3 and 18.5%, respectively.

Local hotels benefitted enormously, and property prices began to climb precipitously as the Portuguese economy – in the doldrums until 2013 – recovered. According to PwC, that growth is going to continue, with Porto alone set to experience a 10% rise in RevPAR against Lisbon’s 7%. This is in spite of the palpable lack of space in both cities, which are built on steep coastal inclines. “In not too long, any unoccupied building became a potential hotel,” Castro explains of the boom. “This drove people who, a few years ago, wanted to sell their buildings at almost any price, but now were standing on their buildings and asking for the Moon.”

State of the interior

Not all hotel growth in Portugal has been confined to its two largest cities. In Elvas, a two and a half hour drive from Lisbon, the Convento de São Paulo sits red-roofed and squat between the Avenue 14 de Janeiro and the town’s 16th-century walls. Once stuffed with chanting nuns, the building has now been converted into a hotel and conference space by Portuguese operator Vila Galé, as part of the nationwide ‘Revive’ project. It’s just the latest in a long line of initiatives by the Portuguese Government to restore and revitalise some of the country’s oldest structures, many of which have long since fallen into disrepair.

“We are attentive to the programme, and we are keeping pace with the launch of new tenders,” says Rebelo. “We will restore the former São Paulo Convent, which had been abandoned for years and even burned twice. It does not make sense to have such a rich heritage in our cities, in the historical centres, and not care for them nor give them a more dignified and economically viable use.”

Vila Galé is one of the major success stories of the Portuguese hospitality market. Founded over 30 years ago, growth has been steady and, according to Rebelo, largely self-funded. In recent years, as property prices in Lisbon and Porto have skyrocketed, Vila Galé has been prudent in balancing its commitment to the valuable urban market and expanding into Portugal’s interior.

“We keep the ambition of having a boutique hotel, along the lines of Vila Galé’s Collection Palacio dos Arcos, in the historic centre,” explains Rebelo, in reference to Lisbon. “We have analysed several options, but either they are not large enough to have the number of rooms that fit our strategy or their prices are very high.”

Not that opportunities in some of the more well-trodden areas of the country are completely absent. Vila Galé already has nine properties in the Algarve, and recently opened a new hotel on Porto’s riverside district. Even so, the interior beckons, on the one hand as a place where the operator can balance its portfolio, and on the other – according to Rebelo – as somewhere it can leverage the totality of Portugal, for the benefit of the world.

“We actually see opportunities there,” he explains. “There are certainly risks involved, as those are less-obvious destinations where demand is not as great as it is on the coastline. But these regions have much to offer. “From the tourism perspective, creating this new offer is a way of attracting our visitors to new destinations and letting tourists get to know more than just Lisbon, Porto and the Algarve.”

Rent-a-city

Back in the cities, however, tourists are still arriving in greater numbers, notwithstanding the lack of new-build hotels. Other signs of strain have also emerged. In March 2018, Bloomberg reported on a growing shortage of hospitality workers across Portugal. But according to Rebelo, this is not as serious as it might seem. “We have not been much affected,” he says, citing Vila Galé’s investment in professional training and career development incentives.

“It’s an ongoing struggle for the hotel business, because workers are never enough,” says Castro. It’s almost impossible, he adds, to attain the right number of workers, simply because occupancy fluctuates. “It doesn’t strike me that there is a shortage. I’m really not sure if that is a relevant issue. Well, it probably will be if unemployment keeps going down.”

That is a very real possibility. This summer, Portugal’s experienced its lowest-ever unemployment rate, a proud moment for a country that only six years ago had to formally request a bailout package from the IMF and the EU. Since then, Portugal’s economy has snapped back to health, to a degree that has prompted some to ask whether things are getting too good to be true.

It’s certainly a pertinent question for the hotel market. Despite the lack of physical space to grow in Portugal’s main cities, plenty of new deals are being signed, with 25 new hotels and 2,400 extra rooms expected to be added next year, according to PwC. “Just last month it was publicised that perhaps the biggest deal, as far as value per room was concerned, was accomplished in Porto: more than €400,000, which is a very relevant value in Portugal,” says Castro.

Trading on natural charm

The problem, of course, remains ascertaining whether this is as much down to the innate demand that Portugal commands as a destination as it is the lack of space in Lisbon and Porto. One metric suggests it is the former that continues to form the bedrock of hospitality growth in the country: the rise in the number of holiday rentals in both cities.

According to market data firm Airdna, there are over 16,079 active rentals in Lisbon alone, 74% of which comprise an entire home. Moreover, out of all professional hosts, 72% owned more than one property, all of which is suggestive of a hollowing out of the Portuguese capital’s already lucrative rentals market.

Even so, the analyst questions how sustainable the boom – for hotels and holiday rentals – actually is. Airbnb, for one, is facing action from local legislators seeking to impose a quarantine zone for new rentals in Lisbon. “I’d say that is a major shift,” says Castro, although, “it’s not a definitive stance yet.”

Tourism also has its existential benefits. The vitality of this market is seen by many Portuguese as a sign that the country is now far removed from the dark days of economic privation it experienced just five years ago. “Tourism was an important factor in overcoming that recession,” says Castro. “So there’s still a sense of appreciation.”

Whether or not international operators can easily reap the benefits in the medium-term is hard to say. Although Marriott operates Lisbon’s largest hotel, and Meliã and Accor seem set to increase their presence in the capital, smaller players, like SanaHotels, VipHotels and Turim, also maintain a significant hold over the market. The appearance of regional operators is more pronounced in Porto, where Vila Galé operates the largest hotel, while Grupo Hotusa – headquartered in Barcelona – is busy increasing its room portfolio.

Preparing for the lows

Nevertheless, there are grounds for international operators to remain optimistic. Capacity is increasing, albeit slowly, while the innate appeal of Portugal as a destination remains high: the cost of flights and living are low; and even with present constraints, this seems set to place the country’s hospitality market in a good position in the long term.

“Those who have worked in this business for 30 years know that there are ups and downs, and one should be prepared for the not-so-good years,” says Rebelo, citing signs that the current boom period in Portuguese tourism will begin to taper off in the next few years. “We have to do our homework. That is, we have to know how to maintain our assets and quality, invest in the qualification of human resources, in innovation, and in an excellent and professional service.” That, at least, will keep the tourists on Lisbon’s trams.