Every year in December we reflect on the past year and provide an outlook for the property market in the year ahead, 2020. The past 12 months continued to see healthy demand for real estate for both permanent living and investment purposes albeit at a slower pace versus the year before. Less supply of existing properties in combination with relatively high prices, sharp downward revisions of economic growth early in the year and uncertainty regarding trade wars and Brexit are the culprits. Despite this property prices continued their upward trajectory by increasing 3% year-on-year, which was in line with the lower end of our expectations. There are reasons to be cautiously optimistic for the upcoming year.

 The demand for properties in 2019 continued to come predominately from buyers from Scandinavia, France, Germany, Italy and The United Kingdom. There is also a noticeable increase in demand coming from Americans and Canadians as a direct result from years of promotional efforts by Turismo do Algarve and Turismo de Portugal.

The Golden Visa and NHR programs remain popular. The former is offered in many European countries such as Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, France, Greece, Ireland, Italy, Latvia, Malta, The Netherlands, Poland, Portugal, Slovakia, Spain and the U.K. However, the latter pulls in more people who either buy or rent (long term) a property. One could argue that without the NHR program property and monthly rental prices would be lower.

Although demand for property was healthy, transaction volume was less than a year ago mainly due to relatively high property prices and the uncertainty that Brexit, trade wars and economic slowdown caused. The fear earlier in the year that various economies in Europe may go into recession looked premature as they continue to grow albeit at a slow pace. The policy response from the ECB to stave off a recession by lowering interest rates even further saw government bond yields going deeper into negative territory. Even 10 year bond yields temporarily dropped to minus 0.5% in Germany. The country is seen as the economic engine of Europe but has suffered from a recession in the manufacturing sector with especially the automotive and related industries taking a downturn. Car manufacturers have long supply chains for car parts, chemicals, metal, textiles and electronics and as such a slowdown affects various industries. The slump in manufacturing also hit other countries. The introduction of trade barriers may still make matters worse. The manufacturing industry role in the economy is much smaller than it was 20 years ago. The larger service sector is still humming along and consumer spending continued to stay strong. "Everyday low interest rates" makes for happy consumers, businesses and governments alike to use a variation to Walmarts famous -everyday low prices- slogan. However, the longer the weakness in the manufacturing sector persist, the more likely it is to spread to other sectors in the economy. Deglobalisation pressures may well continue next year which could have a negative effect on the global economy.

 Christine Lagarde is the new president of the ECB since November 2019 succeeding Mario Draghi. It is expected that she may have a different view on past interest rate policies and may be less inclined to continue with negative interest rates. The ECB has long argued that governments need to do more in order to create a more resilient economy by speeding up structural reforms and increasing spending. Especially Germany with large trade surpluses can spend more on stimulating economic growth by deficit spending. So far the ECB return to stimulus and the prospect of higher government spending have avoided a recession. The bond markets are offering a once in a life time opportunity for fiscal expansion. Germany could spend as much as Euro 100 bn to upgrade outdated infrastructure whereas The Netherlands (another country with a trade surplus) is contemplating setting up a Euro 50 bn fund for infrastructural works and investments in IT. England will have elections soon and both the Tories and Labour are planning to increase spending by respectively Euro 75 bn (3% of GDP) to Euro 106 bn (4% of GDP), up from Euro 51bn. Across the pond the USA plans deficits of 5% of GDP for the next 5 years. Portugal which has one of the highest debt to GDP ratios (estimated at 119.50 % by end of 2019) of Europe has less room for fiscal expansion but it will still benefit from economic expansion abroad.

 The recently re-elected socialist government under Antonio Costa is being credited for Portugals economic success. Over the past 4 years unemployment has been halved, the minimum wage has been increased from Euro 500 to 600 and the economy has grown. In the next 4 years the government wants to gradually increase minimum wage to Euro 700, a 100% increase from 20 years ago when the minimum wage was 350 per month.

 However not all is as rosy as it looks. With debt to GDP at around 120% Portugal has a long way to go to comply with the Stability and Growth pact under the Maastricht treaty which states that debt to GDP should be below 60%. Moreover the country has benefitted from Europes economic growth which is now slowing down. It also benefitted from record numbers of tourists visiting Portugal. This is mainly due to the continuous popularity of the destination as well as the influx of hundreds of thousands newcomers from other holiday destinations such as Turkey, Egypt and Tunisia which are / have been in turmoil. It remains to be seen if these tourist will keep coming to Portugal when stability returns.

 Portugal continues to under invest in education, housing, health care, infrastructure and forest fire prevention. In some quarters there is rising resentment against government backed policies to attract wealthy foreigners who benefit from a 10 year tax holiday under the Non Habitual Residency program while there is a shortage of affordable housing for families who are paying taxes. The government is vulnerable to look for an escape goat and seemingly willing to blame the short term holiday letting sector for creating the problem; a sector that has seen its effective tax rate going up from 3.75% to 8.75 under Costas governing. However, the problem for low income families to find affordable housing has existed for decades and is not unique to Portugal. In truth Portugal does not have the means to subsidise construction for social housing. It is spending too much on generous pension plans for civil servants who also benefit from an outdated early retirement program while elsewhere in Europe the age of retirement is being postponed from the age of 65 to 67 and onwards. Having civil servants retiring at the age of 55 is a luxury Portugal cannot afford. Furthermore Portugal has been warned by the European Commission that its budgetary plan for 2020 poses a risk of non-compliance with the EU Stability & Growth Pact and must submit a new plan as soon as possible. The proposed budget would deviate from the projected debt reduction plan and having a balanced budget.

 With signs that the European economy is starting to bottom out, investors believe that a recession may be avoided and equity markets are near or at all-time highs.

Property markets in Europe have benefited from low interest rates and often are at or above pre-crisis levels. European central bankers are calling for tighter regulation of mortgages to shield banks and households from rising house prices. This can come in the form of capping the percentage of loan-to-value of a property and by demanding from banks to hold more capital against their mortgage lending books. Politicians are reluctant to implement these measures which are meant to cool off the property market and if delayed it may have already caused harm. The financial situation of Portuguese banks is improving however the percentage of non-performing loans is still above the European average.

 Ultra low interest rates have been a boon to businesses, consumers and governments over the past years and the effect is often immediate. But it has a negative impact on savers and pensions funds albeit with a delay. Pension holders worldwide are faced with steep hikes in their contributions or cuts to their benefits. As the number of retirees will only increase over the years, a cut to their benefits reduces their spending power. Although only a small number of retirees may be looking to purchase a property in the Algarve, in general a reduction in benefits may hamper economic growth in Europe and can have a negative effect on property prices overtime.

There is no doubt that a long term investment in property is rewarding. In the short to medium term there can be price volatility but overtime the return on investment is good and as such this should be part of a diversified investment portfolio. Property is relatively easy to understand and if rented out provides a decent return versus a savings account or bonds (exotics not included, as their risk profile makes them unsuitable for the average investor). In addition it offers you the possibility to spend your holiday in your own investment property which is a tempting proposition to many. Overall we expect in 2020 the property market to remain in good condition although we do not see much upside to prices of existing properties. There is good demand for property as long as the price is right. With rental yields of around 4% there are still good investments opportunities to be found. Some properties are more suitable for letting than others. It depends on location, proximity to an international airport, outdoor space and having a (communal) pool or not just to name a few. However, if the property you are interested in purchasing is overvalued, you will struggle to make a decent return on investment.

 Our base case scenario for 2020 is for prices to remain stable with a slight upward bias.

Robert Bijker
Director