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Porto - Portugal

Portugal’s property market began levelling off around this time last year, after a heady fall and years of depressed activity following the 2008 crash. Price stabilization is not yet complete, but there has been a surge of interest in the Portuguese market.

That’s the message from the Royal Institute of Chartered Surveyors (RICS) latest report into the subject. RICS’ monthly Portuguese Housing Market Survey (PHMS) uses around 100 regular respondents to build a picture of people’s attitudes to the housing market in Portugal, and the picture is looking rosier than it has for some time.

The RICS report showed that sales didn’t change too much in the last quarter in terms of volume. But interest in the form of new buyer enquiries has pushed up sales expectations for the next three months; it’s at its highest level since the survey was launched in 2010. The national confidence index leapt from +6 to +16, the highest it’s ever been and the third successive month to show a positive value.

As much as that sounds like good news, it’s not chicken-counting time for Portugese property owners just yet. The boost in interest has yet to be reflected in increased prices, and in fact prices are starting to stabilise in Portugal as we reported last month. That fall is expected to continue, though so is the trend for the rate of fall to reduce.

Ricardo Guimaraes, a spokesman for data provider Confidencial Imobliario, attributes the more positive outlook in the market to “the obvious reduction in house prices… [which] has led to potential buyers seeking opportunistic bargains,” as well as “the slightly more upbeat economic news of late,” which he said was “improving both households’ and investors’ confidence.”

Nor is this increase in confidence regional. The RICS survey shows that interest is rising across the three main regions covered in the survey – Lisbon, the Algarve and Porto. The report indicated that this interest was expected to translate into a long-term rise in price and volume. This will be reassuring news for owners in the Algarve, where prices have followed bank valuations downward almost continually since 2008; referring to this, Mr. Guimaraes observed that, in the light of the RICS report “agents are anticipating whether or not this will have an impact on credit availability from banks.”

Another key indicator of the overall health of the housing market, rental, showed signs of recovery too. Portuguese rents have been falling for some time, but the rate is slowing while tenant demand falls. A report from Confidencial Imobliario in February this year showed that rents actually rose an average of 0.1% across Portugal in the last quarter of 2013. As the two metrics converge, rent expectations and volume expectations also converge, indicating a rental market that is levelling out.

RICS senior economist Josh Miller pointed out that the January results showed buyer interest returning to the market, and said that though sales were expected to pick up in the months ahead, at the moment, “there is little sign of this filtering through into prices. The recent GDP figures also portray an upbeat message although the recovery still has a way to go until it is firmly entrenched.”

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The sluggish progress of Portugal’s economy could keep the house prices in their stabilizing state for the coming year or two, says an analysis. The National Statistics Institute (INE), says that the value of house prices per square meter came down to 981 euros during 2013’s first quarter, seeing a slight recovery during the year’s third quarter to 1,019 euros, with a 4 percent increase. A Fitch Ratings analysis says that the house prices’ stability will sustain over the next few years.

The Analysis

The house prices’ stabilization will continue due to two main factors- the nominal house pricing and the disposable income of households with respect to those prices. Property prices in Portugal are among Europe’s cheapest pricing ranges. The disposable income of households has converged with levels prior to the crisis, when compared to the real house pricing.

Prices have seen an overall drop of about 20 percent from their peak value, and it is predicted that the new demand will continue being subdued in the next few years, which could prevent the housing market from recovering.

The Fitch analysis explains that this is governed by two factors. One, the growth in the economy is expected to continue on a sluggish graph, and two, the households’ access to credit will continue being limited due to the banking sector’s deleveraging attempts. The report talks about the housing loans’ NPL ratio, which came up to 2.2 percent during 2013’s third quarter, which was a peak that it had seen from the time the financial crisis had come to the forefront.

The NPL ratios have a correlation with unemployment rates and interest rates on mortgages, says the report. It says, “had the interest rates not been that low, the NPL ratios would have hit a higher peak when compared to their current levels”.

Predictions for the near future

Fitch expects the BoP NPL ratios to settle at about 2.5 percent or so in the next couple of years, along with a slow recovery in employment. It predicts that interest rates will not see a drastic increase in the next few years. It expects the mortgage lending to be tightened further, with reduced lending volumes in the next couple of years. It shows how the housing loans saw a peak during 2011’s first quarter and has seen a decline of 7 percent, since then, due to the banks’ deleveraging process.

The process of supplying new loans, was modified by financial institutions when they adopted stricter credit standards, resulting in a drop in those who qualified to borrow new loans. It also comments on the prepayment rates, that have gradually subsided to an all time low of 3 percent from the time the financial crisis set in, due to financial institutions being a lot less keen on writing new loans along with stricter credit standards.

The prepayment rates will continue to remain at their low levels, due to limited financing opportunities that are available presently. Also, “borrowers don’t have appreciable incentives for them to prepay debts before the schedule, given the current day economic scenario”, it says.

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Lisbon Skyline at Nighttime

Lisbon Skyline at Nighttime

Portugal’s Parliament voted to press ahead with a record austerity budget that would add taxes to pay, purchases and property.  It’s the most far reaching set of tax hikes in modern Portuguese history, and it is being bitterly opposed by parliamentary Socialists, organized labour and street protests.  It also faces a challenge in the Portuguese constitutional court where it may be declared illegal.

Portugal’s Parliament is about to pass one of the most hard-hitting austerity budgets in its history.  Confounding the assumption that taxation goes with spending, the budget offers both severe cutbacks and record tax hikes.

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Now, while the Algarve is receiving lots of publicity for the worst possible reasons, may be a difficult time to make an objective assessment of the state of Portugal residential market. Following the story of the disappearance of Madeleine McCann from Praia da Luz, more UK nationals than ever before will have seen enough pictures of the Algarve to imagine their own holiday or property investment over there but envisaging the prospect in a depressing light.

Investors needing to make decisions about purchases or sales of property in the Algarve are dealing with sophisticated marketing by numerous developers and estate agents and they could do with more hard facts than are made available to them from these sources. Easier Property, for instance, claims that 200,000 Britons currently own properties in Portugal, making up 11% of the overseas property investments by the British. However, Savills estimate that the total number of overseas properties owned by UK citizens anywhere is only 400,000(read Savills Second Homes Abroad Report (pdf)).

Vila Vita Beach, Algarve
Vila Vita Beach, Algarve [photo credits to rumpleproofskin from Flickr]

The same helpful report shows that Portugal has taken from 6 to 12% of the foreign property market (for UK nationals) since the beginning of the century although there was a drop to less than 4% in 2003 (incidentally the strongest year for Spain). Since then there has been a strong recovery by Portuguese property and last year it accounted for about 11% of overseas property purchases. Looking ahead, the Savills survey respondents indicate that Portugal will take about 8% of residential overseas property purchase investments. Savills and Foxtons agree in figures for the appreciation in the value of 2nd homes in Portugal, both quoting a figure of about 10 to 15% for the 2000-2006 period.

However, it should be stressed that the Foxtons figure is for second homes and that Portugal has been falling behind in recent years in overall house price appreciation, which was 3.16% in 2004, 2.32% in 2005 and actually fell by 0.41% last year. This suggests that acquiring older properties away from tourist centres may be more risky than investing in purpose built developments.

Savills calculate that the average rental yield on a holiday property in Portugal is 4.6% (based on 19 rental weeks a year) but this slips to a net figure of 3.1%. the current net total return (based on the 2000-2006 house price appreciation figures is 14.5% which is roughly the same as Greece and Cyprus and slightly better than Spain’s. The Purchasing Difficulty Index figure for Portugal (the hassle factor) is relatively high. Rental yields in Lisbon at 5 to 6% seem to be slightly higher than in the Algarve on an annualised basis because this is a year-round market. Net rental income is taxed at 15% while local property tax is normally 0.4 to 0.8% with tax holidays of three to six years.

Capital Gains Tax is applied at 25% but there is 50% relief if the value of the sale is re-invested in residential property. However, there is no Portuguese inheritance tax. Portuguese landlord and tenant law strongly favours the latter with tenancy agreement terms either being open ended (which could mean for life) or for a minimum of eight years. For this reason alone, Portugal does not appear to be suitable territory for unwary buy-to-let investors from abroad.

Planning controls are more strict in the western Algarve than elsewhere with the result that extensive new developments right next to the sea seem unlikely (though readers may have seen advertisements for Vigia’s Parque da Floresta in the far west with very nice sea views). However, property developments in other parts of Portugal such as the Joia das Dunas development on the so-called silver coast, nearer Lisbon, or Royal Cabanas Beach & Golf at Tavira in the eastern Algarve , must offer either easy or inclusive access to golf courses. It seems as if ‘with golf course’ is a key criterion for safe profitable investment in Portugal.

In the longer term, though, it seems likely that low prices coupled with attractive locations such as Obidos, Evora, Coimbra (Portugal’s main university town) and the River Douro will encourage more people from Northern Europe to settle in other parts of the country. Property purchase in Portugal already seems to be mainly a matter of lifestyle choice over investment strategy and this is unlikely to change in future.