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Algarve Property Market Outlook 2017 and review of 2016 << Back
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Every year in December we reflect on the past year and provide an outlook for the property market in the year ahead, 2017. Looking back we can say it has been a busy year indeed. During the past 12 months trading conditions for real estate continued to improve both in transaction volume and price. It was also a record breaking year in which the total number of visitors to the Algarve reached a new all time high due to the continuous popularity of the destination as well as the influx of hundred of thousands new comers from other holiday destinations in countries that are currently facing turmoil. As a result 40.000 new jobs have been created in the tourism industry between January and September after 6 years of decline, leading to a substantial decrease in unemployment in the sector. We also experienced an extension of the holiday season beyond the traditional summer months as road traffic, hotels, terraces and restaurants during the months of May, June, September and October were quite busy. This was already the case in 2015, but less pronounced. In addition the demand for rental accommodation for long term stays also increased at all price points. This group of renters consist of people who would like to buy a property but rent first to find out if they like the area, successful applicants of the Non Habitual Resident program (NHR) who need an address and official long term rental agreement and others who simply want to stay 2 to 6 months to escape the winter months back home. The Algarve has much to offer, so the longer you stay the more tempting it becomes to want to own your own place in the sun.

 

The increase in demand for properties this year came predominately from buyers from Scandinavia, France, Germany, Belgium, Italy and Switzerland and often in relation with the NHR program. The British have been active as always, however for them 2016 was a year of extremes due to the volatility in the GBP/Euro exchange rate. Before Brexit Sterling was strong which made it relatively easy for prospective buyers to complete their purchase while after Brexit Sterling weakened which in turn made it easier for British vendors to accept offers and return back to the U.K.

 

Programs like the Golden Visa and the NHR continue to be successful in attracting foreign buyers and we expect this to be no different in 2017. Especially the latter as more and more people from Northern Europe will learn about this program and the benefits. The NHR program is a scheme for individuals who have not been a resident in Portugal during the past 5 years. Once an individual has been granted the NHR status, he or she will be exempt from income tax (work, royalties, pension, interest and dividend) for a period of 10 years. This program is an attractive proposition for many foreigners who like to capitalize on a recovery in property prices while having a 10 year tax holiday. The market benefits more from this type of buyer versus flippers, as they have a strong incentive to hold on to their property during this 10 year period. It is also contributing to more economic activity outside of the summer months to the benefit of local businesses.

 

In line with expectations the newly build properties that came to the marked this year were quickly snapped up by eager buyers. The balance in supply and demand has changed in favor of vendors as the overhang of unsold properties has disappeared. However, there are still some banks who own properties which they foreclosed on during the financial crisis, but these properties are either overpriced and/or simply not attractive to buyers. The truth is that when the crisis started they did not mark them down to realistic price levels fast enough as decision making at banks is notoriously slow which only resulted in more pressure to their balance sheet problems.

 

All in all the residential property market is in pretty good shape with strong demand from buyers and renters alike. On average the price of a property over the past 12 months has appreciated by 9%, which is at the top end of our 7 - 9% expectation a year ago. Current price levels are still approx. 30% below the previous high of September 2008.

 

The low interest rate environment we are currently in also means that it has never been cheaper to arrange a 5 year fixed mortgage rate in Portugal. The 5 year swap rate is 0.1, or equal to ten basis points (100 basis points = 1%). Only a few banks offer 5 years fixed rates and longer maturities such as 10 or 20 years are not available in Portugal. We expected that the interest rate margin that a bank charges the mortgagee would come down in 2016 due to increased completion. This indeed happened, but 25 basis points only to 1,25% for their best customers versus 1,5% one year ago. The reason is that although there is competition for customers, this only relates to less then a handful of banks. Other banks are not (yet) in a position to compete on price due to their weak balance sheets as mentioned earlier. Having said this, we do expect that overtime this will change and for the margin to drop below 1% again.

The recapitalization of banks in Europe is a process that is taking longer than anticipated, banks in Portugal are no different. But some banks are better capitalized than others and have been very active issuing new mortgages.

 

When forming a well informed opinion about the market outlook for 2017 one has to take in consideration not only the economic prospect of Portugal for the year ahead but of other economies. The economy in Portugal is improving but slowly and mainly on the back of an economic recovery in Europe. Portugal´s debt to GBP ratio is still close to 130% while running a budget deficit of 2.7%. The latter is above 2.3% agreed with the European Commission. The reason for slow progress in reducing the budget deficit is that the left-wing government has reversed various austerity measures when it came to power. The government has published their budget proposals for 2017 which if approved includes increasing council tax of residential property with a ratable value of Euro 600.000 and above. Another if not controversial proposal is to increase the tax on short term holiday rentals (Alojamento Local) from effectively 3.75% to 8,75%, as it is estimated that less than 20% of available holiday rental accommodation is official registered. Leaving AL rates unchanged and widening the tax net would result in higher tax revenue than the current proposal, one which penalizes homeowners who did bother to go legal and are paying their fair share in taxes. Nevertheless, the proposed tariff is still below the 28% charged on long term rental income.

 

As the Algarve is a melting pot of cultures and has always attracted buyers from all over the world, it is important to watch how other economies are performing when analyzing trends in property prices. Amid still weak inflation, the consensus in the market is that the ECB in their next meeting on December 8th will announce a 6 month extension of their current QE program which runs until the end of March 2017. Despite a recent uptick interest rates are expected to remain relatively low on a historic basis. Although the underlying economic prospects for Europe are improving with lower unemployment, higher corporate earnings as well as higher consumer spending, the rise of populist and nationalist parties across Europe are reasons for concern as 4 countries will hold elections in 2017, namely France, Germany, The Netherlands and Austria. Therefore the year ahead will offer various challenges too. After Brexit and the surprise electoral victory of Mr. Trump these parties are keen to capitalize on anti-immigration and anti-globalization feelings amongst part of the electorate. Any one of these elections may be reason for a period of uncertainty and caution by consumers, especially when it comes to discretionary purchases such a second home abroad. However, the first watershed moment for Europe could be the upcoming referendum on the 4th of December in Italy. If Mr. Renzi loses the referendum on his constitutional reforms he said he would resign, opening the door for the opposition parties to step in. All 3 opposition parties favour an exit from the Euro.

 

But if we eliminate the noise, the economy of Europe is improving and the American economy is on a solid growth path even before Mr. Trump´s promise to set up a large scale investment program to upgrade infrastructure and create local jobs. Euro zone consumer confidence figures for November are the latest sign that buoyant consumers are likely to accelerate the Eurozone´s economic recovery shrugging off any negativity from the Brexit vote and the election of Mr. Trump as president of the USA.

Fiscal policy clearly turned stimulative in 2016 with slippage on government budgets in several countries including France, Italy and Spain. Portugal has been no different and is likely to miss targets again in 2017.  For decades it has not been able to reach it potential. The issues hampering economic growth in 2016 are likely to be the same in 2017; a slow judicial system, inefficient public administration (e.g. hidden unemployment), restrictive labour regulations and a lack of competition in some sectors.

 

For 2017 we expect another good year for real estate with the building of new construction to continue at the same pace as the past 12 months and will again be easily absorbed by the market. Various councils have announced plans to develop a marina with housing, such as the council of Olhao, Faro, Vila Real de Santo Antonio. Also in Tavira there is a project for a marina with housing which has been in the offing for a long time. These are all highly desirable properties on prime locations and once completed will also be met by eager buyers from all over the World. 

 

In our base case scenario we expect transaction volume of residential housing to slow down in 2017 versus last year while prices of existing homes sales to rise between 4 - 6%. Considering all of the above, we expect the year 2017 to be anything but dull.

 

 

 

Robert Bijker

Director


Published on 01/12/2016 10:07:44
 
 
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