Portugal will endure the second deepest recession in the eurozone in 2012-13, according to Capital Economics.

The gap between the Portuguese property yield and its long-term average is by no means unusually high. But going by the report of Capital Economics, the past decade data indicate that Portuguese property yields are starting to look a little high.

The report points out that the recent eurozone policy developments, namely the ECB's longer-term refinancing operations, and the Greek debt restructuring deal have clearly had a calming influence on the financial markets. Portugal, however, has not been so lucky.

Capital Economics says that yields in each of the three main property segments have been on a rising trend over the past year, with Lisbon's all-property average (7.4 percent) now about 50bps higher than at end-2010. This increase has been in stark contrast to the broadly flat or modestly falling trend seen in cities in less vulnerable economies, but also in other, peripheral eurozone locations.

Kelvin Davidson, property economist of Capital Economics, says that Portuguese all-property yields were above 10 percent for much of the 1990s. Moreover, property to bond yield spreads currently need to be higher than normal to compensate for the weak economic backdrop and heightened risks of tenant failure and loss of rental income.

Moreover, Capital Economics is expecting Portuguese GDP to contract by 4 percent this year and by a further 8 percent in 2013, reflecting the deep structural problems facing the country and the very real risk that it exits the euro next year. Aside from Greece, that would be the deepest recession of any eurozone member.

Capital Economics has forecast that overall, barring a miraculous economic recovery, Portuguese rents stand to fare very poorly over the next few years, which will tend to boost investors' required yields both in absolute and relative terms.

Gdp Portugal Portugal European union