Tourism demand for Portugal has reached record highs in 2023, and the country's economic growth forecasts have risen as a result.

After a record first quarter in Portugal, the International Monetary Fund upgraded the forecast for Portugal’s economic growth from 1% to 2.6%, largely driven by tourism.

In September, data from Portugal’s National Institute of Statistics revealed that between January and July, Portugal welcomed 16.8 million tourists and booked 42.8 million hotel room nights, a 10% year-over-year increase compared to the same period in 2022, which was the previous record.

The World Travel & Tourism Council’s Economic Impact Research Report predicted tourism’s contribution to Portugal’s gross domestic product will be €5.64 billion ($6.2 billion) by 2033, representing more than a fifth of the Portuguese economy.

Chitra Stern, CEO of luxury hotel firm Martinhal Family Hotels & Resorts, which has four hotels in Portugal, said the country's upswing has been a long time in the making.

“For many years, the Ministry of Tourism has been working strategically to increase awareness not just of the main cities in Portugal, but destinations countrywide,” she said.

Increased airlift to additional Portuguese markets has helped. In recent years, U.S. airlines have added direct flights to Lisbon, Porto and The Azores.

In October, United Airlines announced the first and only direct flight from the U.S. to Faro in the Algarve. In September, Portugal’s national airline TAP announced a global expansion that included flights to Africa, Europe and South America.

Better marketing of all of Portugal and an increased number of flights have led to a shift in the country's inbound tourism mix.

Over the summer, the number of U.S. tourists to Portugal increased to the second-largest share of arrivals, which allowed hoteliers to command higher average daily rate.

According to CoStar hospitality data, Portugal's hotel ADR increased to €157.01 year to date, up more than 30% from the same period in 2019. Portugal's revenue per available room in the first nine months of 2023 was €107.77, up more than 25% from the same period in 2019.

By year's end, Portugal is projected to open 50 hotels and more than 5,000 rooms across the country, according to CoStar hotel pipeline data. The number of hotels forecast to open in 2023 almost doubles the combined tally of hotel openings in 2021 and 2022.

Portugal is “seeing more investment beyond Lisbon, in the rest of the country, and also a huge appetite for the luxury and ultra-luxury market,” said Duarte Morais Santos, director of hotels at business advisory CBRE Portugal.

One example opened in March as French fashion designer Christian Louboutin made his hospitality debut with Vermelho, a hotel in the town of Melides in the region of Alentejo.

According to Vermelho's general manager Rodrigo Leal, occupancy rates at the 13-room hotel were high over the summer, but the hotel also has been in demand during periods traditionally considered the low season.

“We witnessed a behavioral change in travelers, driven by the pandemic. There is a growing demand for smaller hotels, located in more remote locations, instead of the large city hotels or big resorts,” he said.

Leal said he has been surprised at the demographic split of guests.

“We expected that most of our visitors would be international, focusing on the North American market, which is indeed the most representative. However, it has been a delightful surprise to host a considerable number of Portuguese guests, something not commonly seen in this type of hotel,” he added.

Douro, one of Portugal’s most rugged regions that's known for its wine and port production, is also becoming a more popular investment spot, Santos said.

IHG Hotels & Resorts’ luxury brand Six Senses Hotels Resorts Spas discovered the region in 2015, but for now it has not been joined by similar luxury brands.

Beyond the small vineyard hotels properties that already exist, there's more interest from international investment groups, which are recognizing the potential of the green, terraced region for luxury spa retreats, Santos said.

Portugal’s two main cities, Lisbon and Porto, offer limited opportunities for global chains as existing buildings in the most coveted, central spots are too small, but one growth area has been in sensitive restorations of heritage buildings by smaller operators for the ultra-luxury market. One example of this is Porto’s 18-room The Largo, which opened this year after a six-year restoration.

“These projects are all about renovating the city but preserving the spirit and authenticity of the city and these buildings. They are limited by the characteristics of existing buildings, but we are seeing very successful track records,” Santos said.

In Lisbon, a strong events calendar, including the annual Web Summit technology conference in November, is drawing business travelers.

Stern said Martinhal is capitalizing on the hotel investment opportunities in Lisbon. In June, the company opened a new luxury branded residences with a hotel component in the city’s Parque Das Nações district, an area initially revitalized for the 1998 World Expo and since transformed into an upmarket “15-minute city” with restaurants, bars, event venues and apartments.

“It’s been our best opening yet,” Stern said. “Thirty different nationalities have invested, and we’re seeing demand from families, empty-nesters and business travelers and digital nomads who can work from anywhere.”

The overall picture in Portugal is positive, but there are a couple of regulatory blips on the horizon, which could limit future investment in the hotel industry.

The scrapping of the Golden Visa, which allowed investors to obtain Portuguese residency without living permanently in the country, could have a significant impact on inward investment, particularly in secondary locations.

“In those areas, the economics are a bit different to cities like Lisbon and Porto,” Santos said. “In low-density areas, like Evora or Beja, we saw investors applying for the Golden Visa with, say, €280,000 and rehabilitating the area. Creating the supply then created demand. Without the Golden Visa, these investments will not be possible anymore. They will not make sense.”

In February, as part of Portugal’s Mais Habitação “More Housing” campaign, the government also introduced a new law suspending new Alojamento Local — or “local accommodation” licenses — to encourage more landlords to put their properties on the long-term rental market.

“While this may benefit hotels, I doubt it will benefit tourism as a whole in Portugal,” Santos said.

With inflationary pressures affecting all markets, Santos said he predicts some slowdown in the market following this year’s record figures.

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