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Algarve Property Market Outlook 2019 and review of 2018 << 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, 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 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 pure economical 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 thereafter, up to a maximum of 12 times the original IMI value.


In this strong market it is hard to comprehend why various banks still have many unsold foreclosed properties on their books, especially in light of the speed at which they repossessed homes at the beginning of the crisis. This may change over the next 12 to 24 months as Lonestar who owns 75% of Novo Banco has reached an agreement to sell off a large chunk of foreclosed properties (a mix of almost 9000 residential and commercial properties) to Anchorage Capital Group, a New York based investment adviser for Euro 390 million while the book value is 716.7 million. This is part of the clean-up of the balance sheet of Novo Banco, with the balance to be covered by the resolution fund. These are properties that can come back on the market sooner rather than later, likely to be priced at a discount to similar properties, as ACG tries to reliquify.


We continue to be in a low interest rate environment, although rates have started to rise. The interest margin banks charge their best customers fell to 1%, which is 15 basis points lower than a year ago. For those who prefer a fixed rate over a floating rate mortgage, the interest rate is 1.31%  (almost unchanged from a year ago) for a 5 year fixed mortgage consisting of the interest margin of the bank and the 5 year swap rate of 0,31%. The current interest rate of a floating rate mortgage is 0.76% (1 % - 0.24% / 3 month Euribor) but one would be exposed to interest rate fluctuations. Demand for mortgages continued to increase in 2018 and we noticed a preference for fixed rate mortgages.

The question is for how much longer will interest rates stay low?  The ECB does not expect to rise rates until the second half of 2019. As a mortgage on a property is a long term commitment, it makes sense to lock in the current low interest rate for a fixed period of time. In Portugal most mortgages have a floating rate based on 3 or 6 months Euribor. Rising interest rates are therefore passed on to the homeowner hurting disposable income and economic activity and may become an issue in 2020/2021.


We remain concerned about the rise of populist and nationalist parties across Europe and the effect this can have on financial stability in 2019, with Italy being a case in point. Since the populist coalition government came to power, Italian sovereign bond yields have gone up as investors are worried about the government´s plan to increase public spending even after the EU rejected its draft budget over concerns about the country´s vast debt burden. The yield on 10 year bonds is currently 3.29%, up from about 2% before the general election in March 2018. If the yield stays at the current level, the debt servicing cost increases by € 9 bn per annum. The ECB keeps interest rates artificially low but eventually they have to move up. When rates move higher it will be a bigger burden for nations with high debt levels such as Portugal.


The economy of Portugal has grown over the past two years and is in relatively good shape. The Bank of Portugal expect GDP to grow by 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020. We believe that the numbers for 2019 and 2020 will be due for a downward revision in line with lower economic activity in Europe. Debt to GBP is still high at 121.2 %, the third highest in Europe after Italy and Greece. This is a major vulnerability as Portugal will need to stay on a firm downward trajectory to bring the ratio close to or below 100% in 2025, especially when economic activity slows down.


When forming a well informed opinion about the market outlook for 2019 one has to take into consideration not only the economic prospect of Portugal for the year ahead but also of other economies. Over the past 12 months the economy of Portugal has benefited from a solid and broad based economic expansion in Europe. However, there are clouds on the horizon. The IMF has revised downward their global economic growth numbers from 3.7% to 3.5% in 2018 and to 3.5% for 2019 and 2020. For the Euro area the ECB lowered its forecast due to global trade tensions that dampen external demand. It now expects real GDP to growth at 2.1% (down from 2.3%) for 2018 and respectively 1.9 and 1.7% for 2019 and 2020 (which we believe could be too optimistic in light of rising trade and financial risks).  Despite recent disappointing data and signs of weakening business confidence the ECB has indicated that it will go ahead with its plans to end their quantitative easing program by the end of 2018 as it sees enough evidence that inflation will rise gradually on the back of the lowest levels of unemployment since 2008 and rising profitability of companies. With tight labour markets the ECB expects wages to rise. The year 2019 will see the start of quantitative tightening after a prolonged time of quantitative easing and brings us in uncharted territory with possibly higher levels of market volatility.


During the course of the year there have been some measures introduced which we think are negative for the buy-to-let investors, namely new restrictive rules for short term holiday letting, additional red tape to comply with collecting of a tourist tax if and when implemented by local councils in the Algarve, and the introduction of additional price bands regarding the AIMI (Municipal Property Tax surcharge) for properties (or property portfolios) with a value of Euro 600.000 and above.


The new rules regarding short term holiday letting are not only a setback for the holiday sector but also for other parts of the economy as it is adding uncertainty to homeowners and prospective buyers interested in covering some of the expenses by renting out properties. This is an issue which has been highlighted by various property associations like the Association of Hospitality, Restaurant and Related Institutions of Portugal  (AHRESP), Associaccao dos Profissionais e Empresas de Mediacao Imobiliaria de Portugal (APEMIP) and the Association of Local Accommodation Portugal (ALEP). Councils are from now on allowed to restrict the number of licenses in a neighbourhood. In addition, homeowners with a condominium can also be stopped from renting out to vacationers in case a majority of neighbours are against it, for whatever reason. In addition, condominiums can also demand an additional and controversial payment of fees when a property is rented out of up to a 30% to cover the increased use of communal areas by holiday makers. Instead of a national law with clear rules and regulation, decision making has now moved to a local level where subjective reasons can and will come into the equation. Instead of unifying homeowners at condominium meetings it will more likely divide them. It is public knowledge that the A.L. legislation is a mess and as such it may not come as a surprise that out of an estimated 200,000 available accommodations in Portugal only approx. 25% (51.000 properties registered by year end 2017; source Deloitte) are legal and registered with the correct license. 


Local councils are now allowed to introduce a tourist tax, should they wish to.

Last September the Algarve Intermunicipal Community AMAL approved the foundations for the tax to be introduced of which 15 of the Algarve´s 16 municipalities gave their approval. Only Silves was against the tax, which raises € 1.50 per person/per night up to a maximum of 10 nights. Each council will still have to vote on this at a local level, which could lead to some councils taxing tourist while others do not adding to confusion to holiday makers. The relative small charge can add up for a family of four. For those homeowners involved in short term holiday letting on a legal basis (Alojamento Local) this is another cost burden they just do not need versus the 70% illegal dwellings they compete with. An exact launch date still has to be decided.

The AIMI comes in effect when a person owns residential property worth more than € 600.000 (€ 1.200.000 for couples), with 0.7% tax up to € 1 mln, and 1% in excess of € 1 mln to 2 mln. For property above € 2 mln the rate is 1.5%. This is in addition to the annual IMI (council tax) of 0.4% of the value of a property.


In our base case scenario we expect transaction volume of residential housing to show a small decline in 2019 due to a lack of supply, increasing interest rates and global tensions, while we expect prices of existing homes sales to rise between 3 to 4%. We also expect healthy demand for good quality newly built properties when priced right. Over the past years the abundance of cheap and easy money from a loose monetary policy has benefited economic growth and employment and indeed inflated prices of financial assets as a rising tide lifts all boats. As we are slowly moving away from a loose monetary policy to a more normalized monetary policy it is likely that the biggest increases in property prices are behind us.


Considering all of the above, we expect 2019 to be another good year.



Robert Bijker


Published on 01/12/2018 00:49:02
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