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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
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