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Great value and good yields in Portugal, where house prices continue to rise

Portugal’s housing prices continue to rise strongly, amidst improved economic conditions. Property prices in Portugal rose by 3.84% (2.97% in real terms) in October 2016 from a year earlier, to an average price of €1,081 (US$1,130) per square metre (sq. m.), based on figures released by Statistics Portugal (INE). After more than three years of depression, house prices in Portugal started to recover in 2014. In Lisbon metropolitan area, property prices were up by 2.59% (1.72% in real terms) y-o-y in October 2016, to an average of €1,308 (US$1,367) per sq. m. House prices rose in all the country’s 24 urban areas. Santa Maria da Feira recorded the highest increase of 12.2% during the year to October 2016, followed by Oeiras (10.4%) and Barcelos(10.4%), Odivelas (9.9%), Porto (9.7%), Villa Franca de Xira (9.6%), Cascais (8.1%), Leiria (7.8%), Loures(7.7%), and Amadora(7.6%). Strong house price rises were also registered in Sintra (6.6%), Setubal (6.5%), Gondomar (6.2%), Maia (6.2%), Almada(6%), Lisboa (5.3%), Vila Nova de Famalicao (5.1%), and Seixal(5.1%). Modest to minimal house price increases were seen in Vila Nova de Gaia (4.2%), Funchal(3%), Braga (2.2%), Guimaraes (0.9%), and Coimbra (0.1%). By property type:

Flats prices rose by 3.31% (2.44% in real terms) y-o-y in October 2016
Villa prices rose by 4.77% (3.89% in real terms) y-o-y in October 2016

Demand is rising strongly. Total transactions rose by 15.8% to 31,535 units from a year ago in the third quarter of 2016, according to INE. “Portugal’s property market is booming once more!" says Chris White of the real estate firm Ideal Homes Portugal. "Sales have increased hugely this year and we’ve seen a significant shift in buyer profile as increasing numbers of investors realize the potential of the Portuguese real estate sector." However the government’s plan to increase taxes on high-value real property in 2017 to pay for higher pensions and state worker salaries makes the luxury property market outlook uncertain. 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. The economy is believed to have grown by a meagre 1% this year, and by is expected to 1.1% in 2017, after expanding by an average of just 0.2% in the past 15 years, according to the International Monetary Fund (IMF

Rental yields on Lisbon apartments good, ranging from 5.4% to 6.2%

Lisbon´s property market is now reasonably priced. Comparatively speaking, Lisbon housing prices are among Europe's lowest:

an 85 square metres (sq. m.) Lisbon apartment in an elite area may cost around EUR 200,000 to buy.
a 120 sq. m. Lisbon apartment may cost around EUR 300,000 to buy.
a 250 sq m. Lisbon apartment may cost around EUR 840,000

How much will you earn? Apartment yields in Lisbon range from 5.4% to 6.2%, with smaller apartments earning proportionately more. These are good yields and the purchase price is attractive for a European capital city, though Lisbon is hardly at the centre of things. Villas in Lisbon have similar gross rental yields. In Algarve, a 120 sq. m. apartment costs on average EUR 1,800 per sq. m., or EUR 215,000. Algarve apartments return rental yields which range from 3.5% to 3.8%. Our rental yields figures assume long-term lets; short-term rentals may earn higher returns. Villas in the Algarve generally earn lower returns. Conclusion: after many years on the back-burner, Lisbon is looking good. Tourist interest in the centre of Lisbon is enormous, so the option of letting via Airbnb is there for much of the year. Lisbon's rental yields are comparatively among the highest in Europe, and Lisbon's price to rent ratios are among Europe's lowest. Round trip transaction costs can be high in Portugal. See our property transaction costs analysis for Portugal and Property transaction costs in Portugal, compared to the rest of Europe.

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 5.69% to 20.15%. Significant costs include the real estate agent’s fee (3% to 5%, plus 23% VAT), transfer tax (0% to 10%) 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.

Economy improving

The economy grew by 1.5% in 2015, thanks to an increase in exports, according to the Bank of Portugal. The improving economic condition comes after a series of dismal years. Portugal’s economy contracted 1.1% in 2013, 4% in 2012, and 1.8% in 2011, according to the IMF. In 2010, the economy grew by 1.9%, but in 2009 GDP contracted by 3%, after average annual growth of only 1.2% between 2004 and 2008. The economy is expected to grow by 1% this year and by another 1.1% in 2017, according to the IMF. Portugal was the second euro zone country to exit its bailout program in May 2014, after three years of austerity. 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. Portugal still faces a huge public debt burden of around 129% of GDP in 2015, slightly down from 130.2% of GDP in 2014, according to the European Commission. The country’s public debt is expected to stand at around 130.3% of GDP in 2016 and to 129.5% of GDP in 2017. The country’s fiscal deficit stands at 4.4% of GDP in 2015, sharply down from 7.2% of GDP the previous year. The deficit is expected to fall further to around 2.7% of GDP this year and to 2.2% of GDP in 2017, according to the European Commission. Inflation stood at 0.7% in 2016, from an inflation of 0.5% in 2015 and a deflation of 0.2% in 2014, according to the INE. The country had an average inflation rate of 2.6% from 2000 to 2012, according to the IMF. Unemployment stood at about 10.8% in October 2016, down from 12.4% during the same period last year. Portugal’s jobless rate averaged about 14.1% from 2011 to 2015, according to the IMF.

Great value and good yields in Portugal, where house prices continue to rise

Flats prices rose by 3.31% (2.44% in real terms) y-o-y in October 2016
Villa prices rose by 4.77% (3.89% in real terms) y-o-y in October 2016

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Great value and good yields in Portugal, where house prices continue to rise

Great value and good yields in Portugal, where house prices continue to rise

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