Portugal: Overview

RENTAL YIELDS

Last Updated: Sep 01, 2009

Tolerable rental yields but not enormously attractive

Is Lisbon a good place to buy investment property? Apartments in Lisbon are relatively inexpensive by European standards at €2,393, and villas are even more attractively priced, with average per square metre (sq. m.) prices of €1,825.

However as an investment property destination, Lisbon remains problematic. A property investment which brings a gross rental yield of 4.8%, as apartments in Lisbon do, is tolerable, but not enormously attractive. Quite aside from the various regulations which discourage property owners, and the country’s recently very low rate of growth (which can be read about on other pages) - factors which should discourage property investment.

The average (sq. m.) price of an apartment in the Algarve is €1,925. Villas average €2,581

Unfortunately, no rental figures are available for villas in Lisbon, so no investment return figures are available.

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TAXES AND COSTS

Last Updated: Jan 16, 2008

Taxes range from moderate to high in Portugal

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	13.2%	13.1%	13.1%
Click here to see a worked example
Source:			Disclaimer

Rental Income: Net rental income is taxed at a flat rate of 15%, withheld by the tenant. Repairs, maintenance expenses, and local taxes are deductible from the gross rent leading to an effective tax rate of around 13%.

Capital Gains: Net capital gains are taxed at a flat rate of 25% 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 tax at rates from 10.5% to 40%.

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BUYING GUIDE

Last Updated: Mar 28, 2007

Buying costs in Portugal
range from low to moderate

Roundtrip transaction costs, i.e., the cost of buying and selling a property, range from 5% to 16%. Significant costs include the real estate agent’s fee (3% to 5%, plus 21% VAT), transfer tax (effective rate at 6% maximum) and legal fees (1% to 2%).

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LANDLORD AND TENANT

Last Updated: Jul 20, 2006

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.

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ECONOMIC GROWTH

Last Updated: Jan 26, 2009

Portugal’s growth is at Europe’s tail end

Portugal, with a population of around 10.6 million, is one of the most globalized countries and has one of the highest quality of life in the world. However, the country has also the lowest GDP growth in Europe.

Portugal continued to experience weak economic growth in 2008, impacted by the global economic crisis. GDP growth was again weak, at 0.5%, after 1.9% growth in 2007 and 1.3% in 2006.

From 2001 to 2005, annual average GDP growth was 0.8%. Portugal’s GDP per head was US$21,019 in 2007, the lowest in the euro area, next to Malta.

While the adoption of the EU ushered a period of economic expansion to some countries, Portugal failed to take full advantage of opportunities created by EU membership. The strong euro vis-à-vis major currencies has impacted the country’s competitiveness.

Portugal's economy is based on traditional industries such as textiles, clothing, footwear, cork and wood products, and beverages (i.e. wine). Its comparative advantage before was low labour costs, but it faces huge competition from Central Europe and Asia.

Productivity is weighed down by low human capital levels, heavy administrative burdens on firms, restrictive labour market regulations and lack of competition in key sectors of the economy.

A huge fiscal deficit, at 6% of GDP in 2005, prevented the use of expansionary fiscal policy to stimulate the economy.

The Socialist Party led by Jose Socrates regained power in the February 2005 parliamentary elections - their first absolute majority since the return of democracy to Portugal in 1974 – and have prioritized reviving the economy.

The government addressed the deficit by raising VAT from 19% to 21% (it has subsequently been cut to 20%, from July 2008). It restricted public sector wages, increased the minimum retirement age to 65 from 60, reduced sick pay sharply, and in January 2006 increased the top marginal rate of income tax to 42%, from 40%. The reforms are paying off; the fiscal deficit was down to 2.6% of GDP in 2007.

However in 2009, the budget deficit is expected to rise again to about 3.9% of GDP (above the EU's limit of 3%), after the government unveiled an economic stimulus package worth €2.2 billion, in a bid to limit the effect of the global economic turmoil.