The time to buy is when everyone else is selling. That holds true not only for stocks but also for commodities like Gold and Real Estate. Another truism is to buy when you least feel like buying. Right now an extremely out of favor asset is real estate in Portugal. They almost can’t give it away. Which is why we are taking a look at it today. In her article Vivian Lewis gives us some great reasons to consider Portugal. ~Tim McMahon, editor.
Be Glad It’s Not Spain
By: Vivian Lewis
There is little enough for Portuguese real estate investors to be cheerful about except that they are not across the border in Spain. This is particularly true of the oldest Portuguese tourist destination, which first attracted foreign investors like the Beatles in the 1960s, the southernmost Atlantic coast, the Algarve.
Some areas around the capital, Lisbon, have Spanish-level vacancies and blight, notably ones near the new eastern bridge across the River Tagus. Lisbon and Porto suburbs have seen prices drop the most in the country, by 10% to 12% adjusted for inflation. However, older developed tourist destinations have been spared the empty windswept acres because there weren’t any large tracts to lure in builders of ticky-tacky 21st-century homes in in the south.
Just as the Algarve has the best micro-climate in Western Europe, it also has plenty of micro-home sites. Single villas or small townhouse developments can be rented out or refinanced when money is short without the regional devastation seen in southern Spain. But overall Portugal missed the post-1990 real estate boom in southern Europe. Only in 2006 (a single year) was there an increase in housing sales. But the crisis has hit all the same.
This year, Portugal expects its economy to shrink by 2% to 3%. It also expects a 38% drop in property investment overall, to a mere 12.5 billion euro. To help matters along, Portugal is offering “Golden Visas” to non-European Union nationals who are willing to invest in the country. It requires an investment of 500,000 euro for residence rights. Many Chinese “entrepreneurs” are taken on bus tours of the Iberian Peninsula to find businesses or properties they might invest in.
Houses For Sale – Clearance Prices
To get rid of repossessed homes, one major bank is offering them for resale at a 12% to 13% discount. Other Portuguese banks will probably follow suit. But the number of repossessions is surprisingly low in Portugal, because families get together to pay up. Another factor helping Portugal, but not its banks, is that most mortgages were taken up by buyers of homes rather than developers, as in Spain. Individual buyers usually borrowed at floating interest rates, which have fallen substantially lower as the European Central Bank has engaged in quantitative easing.
The monthly mortgage bite on Portuguese properties has fallen sharply since the global financial crisis began in 2008 and the European central bank slashed interest rates, in some cases by half. But lower monthly charges are at least partly offset by higher taxes and lower wages and benefits for many Portuguese, particularly those working for the state sector. And of course the mortgage cannot be paid if the breadwinner has lost his or her job.
However, unlike Spanish initiatives to allow jobless homeowners in default to continue to live or squat in their homes for up to two years, no such initiatives have been taken by the Lisbon government. After the “occupations” of empty apartments during the April 25 (1974) Revolution, property protection was written into the Portuguese constitution, if not into Spain’s.
Moreover Portugal was run lately by centrist-right-wing governments that were not trying to encourage home-ownership by unqualified buyers (as in Spain and the United States) before the financial crisis. So there was no housing boom, and few NINJA mortgages were written.
Driving to the Algarve, you go through the formerly most left-wing parts of the country, the Alentejo, where the 1974-5 Revolution broke up hereditary land-holdings for peasant collectivization. The peasantry then amounted to a third of the Portuguese population. Today these areas are flourishing, often with foreign agro-investors taking the lead, growing wheat, corn, tomatoes, citrus fruits, dairy products, cotton, and other crops that can be profitably sold to northern Europe.
A string of good roads financed by the European Union has replaced the old dirt roads, and they truck their goods to markets farther north. However, many highways are avoided by truckers and drivers who don’t want to pay the new tolls. One result is that all the toll-takers have been fired by the toll-road companies and replaced with electronic readers, adding to unemployment.
Portugal still manages to make clothing and shoes profitably in competition with Asian makers in China and beyond. It sells gourmet foods (including cheeses, ready-meals, sausages, jams, and wine) to northern Europe. It dominates the European market for orange and grapefruit juice. However, for all the goods it sells, Portugal imports even more. The country has been running a trade deficit for decades.
The impact of the current crisis has been to cut that consumption sharply. The Portuguese retailing sector is suffering with shuttered shops and empty malls. Because they knew they could not continue buying a modern lifestyle via imports, most Portuguese accept that they have to spend less. There is much less politicking and more belt-tightening than in Spain.
Yet a final plus for Portuguese real estate, particularly in the Algarve, is that many buyers were northern Europeans whose economies are not as troubled as those in the European sunbelt. If they borrowed from Portuguese banks, their mortgages were more limited, to only 55% or 60% of the full purchase price. So they are not as much in the hole as the native Portuguese. Having said that, many homes are now for sale or rent at fire-sale prices because their owners, whatever their nationality, cannot pay the monthly bills, creating an overhang of available properties that is depressing the real estate market.
In addition, the rental season is now more truncated, confined to the high summer months because owners are terrified of renting to tenants it will take a lawsuit to evict. Respectable folks with a good reason to want to rent in the winter can offer only peppercorn rents and get away with it. Families with child or pensioner members are vetoed lest they refuse to move. Protecting property owners is a key element of Portuguese local governments, particularly in the Algarve. Rules on density of building, construction height limits, and minimum setbacks from the waterfront and the beaches (which are publicly owned and managed) are strictly enforced. Watercourses, sand spits, cliff edges, and bird sanctuary sites may not be built upon.
Unlike Spanish municipalities in the southern countryside where often corrupt local officials worked hand-in-glove with developers to build where it was not legal, Portuguese local Algarve “camaras” (town councils) had an existing constituency of home-owners to protect. They painstakingly inspect sites for compliance. They also intervene in neighborhood disputes over property lines and construction. But they do not do evictions.
Again the smaller scale of Portuguese building kept the most abusive deals from being done and then hidden from the public. What does all of this add up to for the would-be buyer in this marketplace? Bottom line, with bargain prices on offer, this is a good time to bid on an Algarve home, particularly if you can afford the purchase price (always negotiable!) without depending on rental income to pay the mortgage. Cash is king. Lowball bid.
There are no restrictions whatever on foreign individual buyers of Portuguese property. You should not try to use an offshore company to make your purchase (from Gibraltar, say) because there are now hefty new taxes imposed on such purchases. Any property bought will incur a turnover tax of about 12%, which you should keep in mind when working out what you can afford. The euro is currently quite low, under US$1.30, another argument for buying now.
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This article originally appeared in Live and Invest Overseas and was reprinted by permission.
Image courtesy of artur84 / FreeDigitalPhotos.net