House prices are rising in Portugal, excellent value to be had
Last Updated: May 04, 2015
- In Lisbon metropolitan area, property prices were up by 4.32% (4% in real terms) y-o-y in March 2015, to an average of €1,231 (US$ 1345.11) per sq. m.
- In Porto metropolitan area, house prices rose by 2.59% (2.27% in real terms) during the year to March 2015, to an average of €951 (US$ 1039.16) per sq. m.
Among urban areas Vila Nova de Gaia had the highest annual house price increase of 7.67% during the year to March 2015, followed by Setúbal (7.51%), and Vila Nova de Famalicão (7.06%). Other notable house price increases were recorded in Sintra (5.03%), Lisboa (4.12%), Almada (2.98%), Vila Franca de Xira (2.53%), Matosinhos (2.19%), and Barcelos (2.08%).
The municipalities with the largest annual house price declines were Oeiras, with a drop of 4.59%. Other municipalities struggling include Coimbra (-3.95%), Cascais (-3.61%), Leiria (-3.35%), and Funchal (-3%).
Dwelling completions continue to plunge in 2014, with completions down by 54% y-o-y to 9,429 units.
There are no restrictions on foreign property ownership in Portugal and transaction costs are generally low.
Portugal will grant a 5-year residency permit to non-EU citizens who buy a minimum of €500,000 worth of property. The permit allows holders to work or study, as well as to travel in Schengen countries. They can opt to apply for permanent residency after five years.
Moderate to good yields on Lisbon apartments, ranging up to 6.41%
A 150- sq. m. villa or house in Lisboa costs around EUR 2,400 per sq. m and in the Algarve costs around EUR 2,060 per sq. m. Apartments are also more expensive in the capital region. In Lisboa, a typical 120 sq. m. apartment in an elite area changes hands at around EUR 1,800 per sq. m. while in Algarve, a 120 sq. m. apartment costs on average EUR 1,600 per sq. m.
Gross rental yields from villas in the Algarve, i.e., the gross return on investment if fully rented, are poor, at around 2.5% only. Algarve apartments return better rental yields, ranging from 3.52% to 3.79%. Rents from apartments in the Algarve range from around EUR 4 to EUR 5.5 per sq. m. per month, so you can expect monthly rental income of about EUR 560 from a 120 sq. m. apartment. Villas in the Algarve rent for around EUR 5 per sq. m. per month, so you can expect monthly rental income of about EUR 1,635 from a 350 sq. m. villa.
Lisboa apartments obtain much better yields, ranging from 4.94% to 6.41%. In Lisboa, rents from apartments range from about EUR 8 to EUR 10 per sq. m. per month, so that a 120 sq. m. apartment can be rented for about EUR 1,000 per month. Villas in Lisboa rent out for around EUR 7.50 to EUR 10 per sq. m. per month, and a 300 sq. m villa can be rented for around EUR 2,100 per month.
Smaller apartments tend to be most profitable. A 60 sq. m. apartment in Lisboa returns around 6.41% rental yields, whereas a 200 sq. m. apartment returns only 4.94% rental yields. Moderate rental yields are also observed from villas in Lisboa, and again the rule is the larger the villa, the lower the yield.
Taxes range from moderate to high in Portugal
Rental Income: Net rental income is taxed at a flat rate of 28%, withheld by the tenant. Repairs, maintenance expenses, and local taxes are deductible from the gross rent.
Capital Gains: Net capital gains are taxed at a flat rate of 28% in Portugal. Acquisition costs are deducted from the gross selling price of the property.
Inheritance: There are no inheritance and gift taxes in Portugal.
Residents: Resident individuals' worldwide income is subject to progressive tax rates, from 14.50% to 48%.
Buying costs in Portugal are moderate
Roundtrip transaction costs, i.e., the cost of buying and selling a property, range from 12.19% to 16.65%. Significant costs include the real estate agent’s fee (3% to 5%, plus 23% VAT), transfer tax (6.5%) and legal fees (1% to 2%).
Portuguese law is strongly pro-tenant
The law in Portugal is still strongly pro-tenant, despite substantial changes brought by the New Urban Lease Act.
Rent: The amount of the rent can usually be freely agreed between the parties, with the exception of low cost housing. Rent reviews can also be freely agreed (although they must take place annually), and, with careful drafting, cost-of-living rent increases and suchlike can be agreed.
Tenant Security: The parties may stipulate fixed-term contracts, but they must have a minimum initial term of five years, and there are automatic and consecutive extensions of three years. In the absence of such a fixed term stipulation, the lease agreement will be considered open-ended. Open ended contracts were previously much like ‘tenancy for life’ agreements and are very difficult to terminate.
Slowly, slowly: Portugal’s economic growth continues in 2015In 2014, the Portuguese economy's GDP expanding by 0.9%, according to the Bank of Portugal, pushing it out of its previous recession. The gradual recovery started in late 2013. Growth in 2014 was supported by the increase in private consumption and, to a lesser extent, investment.
This good news comes after a series of dismal years. Portugal’s economy contracted by 1.4% in 2013, 3.2% in 2012, and by another 1.3% in 2011, according to the IMF. In 2010, the economy grew by 1.9%, but in 2009 GDP contracted by 2.9%, after average annual growth of only 1.2% between 2004 and 2008.
The economy is expected to continue its gradual recovery. In 2015, Portugal’s GDP is predicted to grow by 1.7%, followed by 1.9% in 2016, and 2% in 2017.
After three years of austerity, Portugal was the second euro zone country to exit the bailout program in May 2014. Portugal had sought its €78 billion (US$ 88.6 billion) bailout program in 2011, due to the government’s inability to meet its debt payments.
"The Portuguese authorities have established a strong track record of policy implementation to address the country's long-standing structural problems…This bodes well as Portugal exits its EU/IMF-supported programme," according to Christine Lagarde, IMF’s Managing Director.
Portugal still faces a huge public debt burden of around €225 billion (US$ 247.54 billion) or around 130.2% of GDP. Its fiscal deficit stands at 4.5% of GDP in 2014, according to the Statistics Portugal (INE), but is expected to fall to around 2.7% of GDP in 2015.
Inflation slowed to 0.04% in 2014 according to the IMF.
Unemployment remains high at around 13.5% in March 2015, down from 14.7% in March 2014, according to INE.