Great value and good yields in Portugal, where house prices continue to rise
January 08, 2018
In Lisbon metropolitan area, property prices were up by 4.9% (3.3% in real terms) y-o-y in November 2017, to an average of €1,386 (US$1,664) per sq. m.
House prices rose in all the country's 24 urban areas. Amadora recorded the highest increase of 12.88% during the year to November 2017, followed by Coimbra (12.82%), Odivelas (12.62%), Oeiras (12%), Cascais (11.65%), Matosinhos (9.84%), Leiria (9.83%), Loures (9.17%), Sintra (9.01%), and Funchal (8.41%).
Strong house price rises were also registered in Vila Franca de Xira (7.75%), Santa Maria de Feira (7.72%), Maia (7.59%), Vila Nova de Famalicão (7.5%), Almada (7.47%), Seixal (7.22%), Gondomar (7.02%), Setúbal (6.79%), and Braga (6.75%).
Modest house price increases were seen in Guimarães (5.67%), Lisboa (5.51%), Porto (5.28%), Barcelos (3.74%), and Vila Nova de Gaia (3.54%).
By property type:
- Flats prices rose by 5% (3.4% in real terms) y-o-y in November 2017
- Villa prices rose by 4.9% (3.3% in real terms) y-o-y in November 2017
Demand is rising strongly. In Q3 2017, the total number of housing transactions rose by 23% to 38,783 units from a year earlier, while transactions value surged 34.4% y-o-y to €4.86 billion (US$5.83 billion), 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."
Clearly the new wealth tax introduced this year, applicable to higher-valued properties, has in fact had a negligible impact on the luxury housing market.
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.
In Q3 2017, the Portuguese economy expanded by a modest 2.5% from a year earlier, from annual rises of 3% in Q2 2017, 2.8% in Q1 2017, 2.2% in Q4 2016 and 1.8% in Q3 2016, according to INE. The economy is expected to grow by 2.6% this year, up from last year's 1.5% expansion and the highest growth since 2000.
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 District range from 4.5% to 6.7%, 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.
Cascais apartments can generate excellent returns at 6.7%, while houses in Oeiras can generate surprisingly good returns at 6.15%
In Faro, Algarve, a 120 sq. m. apartment costs on average EUR 1,870 per sq. m., or EUR 215,000. Apartments in Faro return rental yields of around 4.5%.
Our rental yields figures assume long-term lets; short-term rentals may earn higher 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 improvingIn Q3 2017, the Portuguese economy expanded by a modest 2.5% from a year earlier, after annual rises of 3% in Q2 2017, 2.8% in Q1 2017, 2.2% in Q4 2016 and 1.8% in Q3 2016, according to INE. The economy is expected to grow by 2.6% this year, up from last year’s 1.5% expansion and the highest growth since 2000.
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.
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$93.6 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 130.1% of GDP in 2016, from 129% in 2015 and 130.2% in 2014, according to the European Commission. The country’s public debt is expected to fall to around 126.4% of GDP in 2017 and to 124.1% of GDP in 2018.
The country’s fiscal deficit stands at 2% of GDP in 2016, sharply down from 4.4% in 2015 and 7.2% in 2014. The deficit is expected to fall further to around 1.4% of GDP this year, according to the European Commission.
Consumer prices rose by 1.5% in November 2017 from a year earlier, slightly up from 1.4% in both September and October 2017 and 1.1% in August 2017. Inflation is expected to accelerate to 1.6% this year, from an annual average of just 0.4% in the past four years, according to the IMF.
Unemployment stood at about 8.5% in Q3 2017, down from 8.8% in the previous quarter and from 10.5% during the same period last year and the lowest level since 2008. Portugal’s jobless rate averaged about 13.6% from 2011 to 2016, according to the INE.