Property
2018 Property update
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Property expert Robert Bijker from Land and Houses Algarve provides his regular annual update on the property market in 2018
very year in December we reflect on the past year and provide an outlook for the property market in the year ahead, 2019. The past 12 months have been very exciting as real estate continued to be popular for both permanent living and investment purposes. The total number of visitors to the Algarve decreased a bit year-on-year, but this was to be expected after two consecutive years of record breaking numbers. Strong demand for both residential and investment property saw prices of existing properties rise by 9.5% which is just above the top end of our expectation of 9% made in December 2017. There are various reasons to be less bullish for the upcoming year. The demand for properties in 2018 continued to come predominately from buyers from Scandinavia, France, Germany, Italy and The United Kingdom and often in relation with the NHR program. The British continued to buy property seemingly undeterred by a relatively weak Pound and ongoing Brexit saga for most of the year, although in Q4 some buyers had second thoughts as poor visibility about what the future will bring created uncertainty. However, the majority of buyers from the UK did not want to put their life on hold and hedged themselves once agreement has been reached over the purchase price of a property. In general, the majority of buyers in 2018 were cash buyers. For those buyers who needed a mortgage to complete their purchase this was also a good year as banks are competing again for business which helps to keep costs down and the historic low level of interest rates proved to be a boon. For 2019 we are cautiously optimistic. A major factor is that the global economy is slowing down. The IMF has lowered their economic growth forecast for 2019 and 2020 in light of elevated political risk. Growth is still expected, however, at a lower rate than expected 9 months ago. Trade wars, rising nationalism, Brexit, the threat of interruption in global supply chains are all contributing to an increase in uncertainty. In addition we are nearing
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the end of QE and interest rates can be expected to rise to levels more suitable to where we are in the economic cycle. Higher interest rates and increased levels of uncertainty are no friends to business. On the other hand, the price of oil has dropped from $86 per barrel in October to $60 in November which helps to soften the blow if the price stays around current level. On the 11th of December the House of Commons will vote on Theresa May’s historic Brexit deal agreed by European leaders. The agreement aims to offer a smooth divorce to end Britain’s 45 year involvement in the European project, however, many details will have to be ironed out before December 2022, adding to years of uncertainty and potentially another cliff-edge. The deal is a compromise and is all about damage control. As a result both Remainers and Brexiters are not very happy. If Brexit was all about Britain taking back control of its own destiny, it has not delivered. The truth is that a hard or soft Brexit would always come at a cost. In order to provide clarity, the government will publish an economic analysis of the cost of no-deal versus the current agreement. This may also make it painfully clear that from a purely economic point of view it would be better to stay. Ever since the referendum in 2016 the economic loss has been considerable. The UK economy has grown below capacity as the strain on resources of corporations, both financial as well as managerial, took its toll. According to EPFR, a data provider, UK equity funds have had net outflows of $1.01tn as investors withdrew funds on concerns about the impact of Brexit on Britain’s corporate sector. (E.g., JP Morgan alone spent over Euro 400 million to prepare for Brexit). Demand for properties in the Algarve outstripped supply in 2018 as strong economies bolstered both local and foreign buyer’s confidence about the future. For some, the Golden Visa and NHR program was just the icing on the cake. The NHR program was first introduced in 2009 and has been highly successful in attracting foreigners to take up residency in Portugal, often allowing them to purchase a larger property due
to their increased purchasing power in light of the tax benefit. The program has come under attack by tax authorities from Finland, Sweden, Norway, France and the Netherlands as they deem the 10 year tax holiday resulting from double taxation treaties, unfair. Most people do not want to dispute with tax authorities and as such it is good to know there are other tax efficient solutions in Portugal for foreigners that make tax mitigation just as worthwhile. Both newly built properties and good quality resales have been quickly snapped up as they appeared on the market. With limited supply it has become a seller’s market. In some cases prices of new developments reached unprecedented levels as builders aimed for a moon shot; some succeeded and others reduced prices shortly after the introduction to more realistic levels. Renovation of old properties/ ruins in town centres continued to be popular amongst investors as there are several benefits as part of the urban rehabilitation program, such as a lower VAT rate (6%) on construction materials which effectively reduces building costs by more than 10%, no cost for the building license, exemption of IMT (property transfer tax) and exemption of IMI (council tax) for 3 years. Some banks offer preferential (lower) interest rates to finance the renovation work. The rehabilitation program supports the improvement, renovation/restoration, repair and conservation of property for residential use. As demand for this type of property is outstripping supply, it remains a financially rewarding opportunity to buy and renovate a property in urban centres. However, despite these favourable incentives and conditions, there are still many old properties that remain unused and sometimes in ruin which is an undesirable situation in light of the stress in various cities and towns for affordable housing. As such, the government has plans to allow local municipalities to dramatically increase the council tax (IMI) in case a property has been vacant for more than two years and could start with an increase in IMI by 600% as early as 2019. The IMI can continue to increase 10% per annum
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