Down once more...

After increases in 2002-4, the prices of residential dwellings in Portugal then stagnated, and actually declined during 2007.

The average per square metre dwelling price in Portugal (as a whole) fell from €1,243 per sq. m. in June 2006 to €1,220 per sq. m. in January 2008, according to the Instituto Nacional de Estatistica (INE), Portugal.

In Lisbon average prices were stagnant in 2007, a worse performance than in the two previous years (1.3% rise in 2006, 1% rise in 2005 and 1.86% decline in 2004).

Prices in Algarve have, in recent years, been rising faster than in the rest of Portugal. But in 2007 things turned around, and they rose only 0.13%, after a 6% price increase in 2006.

The rest of the country fared even worse. Average dwelling prices fell in Alentejo (-2.9%), Centro (-4.34%) and Norte (-1.249%), and greater Lisbon (-0.79%).

Even houses have fallen in value. In recent years, houses have performed better than apartments, arguably because Portugal is still handicapped by laws biased against landlords (see below).

Houses have performed better than apartments:

Weak house price growth

The house price boom that swept through most of Europe and the developed world from 1995 to 2006 missed Portugal. From 2001 to 2006, average property prices rose 100% in Spain, compared to a measly 17% in Portugal.

Two main factors led to weak house price growth in Portugal:

* Weak economic growth. Portugal’s GDP growth in 2007 was 1.1%, the lowest in all of Europe. Average annual GDP growth from 2001 to 2005 was 0.8%.

* Housing oversupply. Low interest rates encouraged housing investments in the 1980s, and dwellings per 1,000 inhabitants rose from 349 in 1980 to 482 in 2000, among the highest in Europe. The total housing stock increased 28% from 1981 to 2001, while population only rose 4.4%. Almost 45% of Portugal’s present housing stock was built between 1981 and 1990.

The “other market”

The Algarve, Portugal’s “other market,” is popular among British and Scandinavian retirees. Property prices in the Algarve are among the highest in Portugal. Prime property prices in Algarve range from €3,400 to €4,000 per sq. m., higher than prices in the centre of the capital, Lisbon, which range from €2,500 to €3,100 per sq. m., according to Global Property Guide research.

“Prices in the Algarve have more than doubled since 1998/9,” explains Nick Sadler of Sadlers', the Algarve arm of Knight Frank.

“A lot of affluent people in the UK have reached the point when they want to convert their affluence into property,” says Sadler. “The Algarve is very attractive to them.”

The Algarve’s rental market continues to be very strong, supported by beach and golf tourism. “The Algarve has the advantage that it is a golfing destination, so there are both golfing tourists and beach tourists,” says Pascal Marreiros, Director of Algarve Gold.

“We also have good airplane flights. We are also a very secure destination, no terrorism here.” Travel to the Algarve has also been made easier by the Lisbon-Algarve motorway, and by the dramatic increase in the size of Faro airport. There are regular Easy-Jet flights.

New housing law (NRAU)

Despite ‘oversupply’ there is considerable pent-up demand for rental housing in Portugal, because of restrictive housing policies. Tenancy laws have long given tenants controlled rents and protected them against eviction, discouraging landlordism.

As a result, young people have long had to either live at home, or pay exorbitant key money, or buy an apartment.

The handicapped private rental market shrunk from 39% of dwelling stock in 1981 to 21% in 2001. The owner-occupancy rate, on the other hand, rose from 57% in 1981 to 76% in 2001, while the social rental sector remained at 3% to 4%.

Many city apartments are in an appalling state, having never been renovated by their landlords.

However in June 2006, the New Urban Lease Act (Novo Regime de Arrendamento Urbano – “NRAU”) was passed. NRAU was enormously controversial, and was at the centre of passionate public debate.

New contracts:

• Rents can be freely agreed.
• The minimum term for fixed-term residential tenancies is 5 years.
• There are automatic and consecutive extensions of three years, but the landlord may prevent renewal, by giving notice 1 year ahead.
• Where there is a termination agreement, judicial proceedings are not necessary.

However NRAU does not go far enough with regard to old contracts (see readers’ comments on Portugal landlord and tenant pages).

For rental contracts already in force, the increased rent is based on a valuation of the building under the Imposto Municipal Imobiliário (IMI) (Property Council Tax).

Under its terms, each building is given a conservation rating with a maximum value of 3. The new maximum annual rent is 4% of the product of the fiscal appraisal and the conservation index. For example, for a property appraised at 100,000 euros and with a medium conservation index (which corresponds to a coefficient of 0.9), the annual rent will be 3,600 euros (100,000 euros x 0.9 x 4 per cent = 3,600 euros), meaning the monthly rent is 300 euros.

Rent increases are usually phased over 5 years, although in specific situations it may be either a 2-year or a 10-year period. The maximum amount that rent can be raised per month is €50 in the first year, and €75 in the second to fourth years (or ninth year). At the end of this period, the 5th or the 10th year, the limit no longer applies.

One of the most controversial aspects of the new law is that where the conservation rating is lower than 3 (i.e., most cases), the tenant can require the landlord to renovate the property. If he refuses, the tenant is entitled to buy the property for the value attributed to it under the terms of the IMI code (the works must then be carried out, otherwise the property reverts to its previous owner).

While the New Urban Lease Law will allow property markets to work more effectively, it is quite unfair to landlords with existing rental contracts.

Nevertheless, now it could be an attractive proposition to be a landlord and to rent out property, though the law still gives far too much security to the tenant. Be warned however that the new law’s implementation faces hitches, with the Portugal Resident reporting that obtaining a property rental license is “complex, costly and time consuming.” Costs for acquiring a license are around €1,200 or more and can take several months to accomplish.