Portuguese real estate - a safe investment

If there is a sector of the Portuguese economy that seems impervious to a climate of growing economic uncertainty and unpredictability due to geopolitical shocks and rising inflation, it is Portugal's real estate sector. The average house price rose 18.7% in 2022 and agencies overseas are warning of a slowdown in the real estate market. The market can't go up indefinitely, right?

The Golden Visa Program

Essential Business spoke to the president of the Portuguese Association of Real Estate Agencies and Professionals (APEMIP), Paulo Caillado. Portugal's real estate didn't move in 2012. In line with the rest of the economy, buying activity has been weak after the country's credit rating was deemed "unfit" by international rating agencies, forcing the government to seek help from the international troika of lenders. That year, the government of the center-right PSD/CDS-PP coalition, led by Pedro Passos Coelho, launched an investment attraction program offering permanent residency status to non-EU residents. It was hoped this would attract entrepreneurs to start businesses, invest in Portuguese companies and hire staff as unemployment reached 17%. It didn't work. However, one of the options for Authorization of Permanent Residence through Investment Activity (ARI), which requires a more reasonable €500,000 real estate investment, has worked. Although symbolic - the program attracted just over €6 billion over 10 years - it sent the message that Portugal was open for business, and provoked a momentum of migrants because of the golden visa, as ARI was called, as well as redesigned tax regimes such as the Non-permanent Resident (NHR). Articles circulated in the press around the world; journalists flying in to cover Portugal's sovereign debt crisis were captivated by Portugal's image, and over the next decade, tourists and foreign home seekers alike were taken in to buy property at token prices. There is no doubt that the Golden Visa program revived a dead real estate market, and real estate agents, attorneys, appraisers, accountants, painters and decorators, small builders and large international developers suddenly had more work than they could handle. The scheme inadvertently began the regeneration of the centers of Lisbon and Porto, and then spread to historic medieval and baroque cities throughout Portugal. After being the sick man of Europe, Portugal has finally come to its senses, and it all started with Portugal's real estate. But there were predictable but unintended side effects. Urban housing stock, which had barely increased since the late 1980s and early 1990s, was depleted, scarcity fed demand, and demand pushed prices up. As a result, the government shocked the public in February with a housing pact aimed at alleviating unaffordable housing in urban centers, but with the exception of tenant associations, no one liked the proposed measures. But house prices continue to rise in sunny Portugal as the market falters amid war and inflation in northern Europe and the UK. But is the sector that has helped save the Portuguese economy since 2012 now threatening to collapse due to excessive speculation?

The government's measures

Paulo Caiado thinks this is unlikely.

Restrictions on the real estate market

A growing number of voices say that speculation driven by a real estate shortage and an infusion of affluent European migrants and citizens from Brazil, the United States, China and the Middle East have driven up prices to the point where (it is almost impossible to find a one-bedroom apartment in Lisbon for less than €350,000) that Portugal's middle class has been squeezed out of the market, and the government is calling for restrictions on the real estate market modeled on Canada. As of January 1, 2023, foreign buyers are prohibited from buying homes in Canada for two years under the Non-Canadian Residential Real Estate Prohibition Act. The ban was passed in June 2022, but didn't go into effect until January. "Introducing an act like Canada's simply doesn't make sense. Foreign investors have created demand and put pressure on the high-end segment of the real estate market, which has no social impact or consequences," says Paulo Caiado.

Real estate taxes

Associations of real estate have long argued that the number of ordinary and additional property taxes has become one of the obstacles to the development of housing in Portugal. One of the main property taxes in Portugal is the Municipal Mutual Property Transaction Tax (IMT), which is levied by the government when you buy a house. It is calculated based on the value of the property for tax purposes or the amount shown at the time of purchase, whichever is higher. Another is the stamp tax, which is calculated based on the amount specified in the contract. The buyer must pay a transaction tax of 0.8% upon signing the contract. In addition to the taxes paid at the time of purchase, there is a tax paid each year as long as the owner owns the property, which is the Municipal Property Tax (IMI). IMI percentages are set annually by the property location board. In the case of urban buildings, the rate can range from 0.3% to 0.45%. The rate may rise to 0.5% for municipalities enrolled in the Local Economic Support Program, and for rural buildings the rate is 0.8%. Properties worth more than 600,000 euros are subject to AIMI (municipal levy or wealth tax), which averages 0.7% of the property's value. "As in other European countries, a single annual tax would be a much simpler regime and would stimulate the turnover of real estate transactions," says Paulo Caillado.