Every year in December
we reflect on the past year and provide an outlook for the property market in
the year ahead, 2021. It has been a year like no other, one that will stay on
our minds forever. The by long-term historical standards relatively mild
Covid-19 pandemic has led to many lost lives and enormous economic damage
causing great uncertainty for people and businesses alike and is still ongoing.
Contrary to our expectations the market held up remarkably well. We have seen
some sharp reductions in asking prices of resale properties, but the majority
of vendors left prices unchanged. There has been many cross currents this year.
Some areas like Quinta do Lago and Vale do Lobo have seen an increase in
transaction volume with an upward bias in property prices. In other areas of
the Algarve prices remained stable to slightly lower. Additionally there was a
decline in transaction volume partly due to the lack of supply of properties
and travel restrictions. On the other hand newly built properties sold well and
at higher prices per square meter than the year before. Also demand for quality villas with pools and penthouse apartments on good
locations held up well, in particular in the higher price segment. These types
of buyers are likely to be less affected by the economic uncertainty. They are
mostly cash buyers who are faced with negative interest rates on their savings
accounts in their home countries.
The economic situation
is still dire as we are now in the pandemics 2nd wave and an
increased possibility of a double dip recession. The purchasing managers index
(PMI) is a leading indicator of business activity which fell to 45.1% in
November, a six month low and down from 50% the previous month. A reading below
the 50% mark indicates that the majority of businesses reported a contraction
in activity.
For the Eurozone the
ECB expects an economic contraction of 7.4% for this year while lowering their
economic growth expectations for 2021 from 6.1 % to 4.1% due to the 2nd
and quite likely 3rd wave of infections. This forecast is made even
with the consideration that vaccines are becoming available for the general
public in the course of the year, which together with more testing and tracing
offers an opportunity of the normalization of day to day life in the future.
The Algarve has been
badly hit as economic activity is highly dependent on tourism and hospitality
related industries, a sector of the economy which has been most affected. Demand
for these services has disappeared almost overnight. Now we are in the
second-wave which could delay the Eurozone economic recovery as fourth quarter
economic activity is expected to decline by 2.3% due to new restrictions and
lockdowns. The economy of Portugal is expected to contract by 9.2% for the
whole year and to rebound by 5.4% in 2021. Unemployment is expected to reach 8%
in 2020 and only to recover slowly in 2021 to 7.7%. The UK is an important market as many
holidaymakers who visit the Algarve every year have been keen buyers of
property. However, the UK is badly affected by the Corona virus in addition to
the uncertainty of Brexit and is expecting a fall in GDP of 11.3% in 2020, the
largest drop in 300 years.
With a sharp and deep
recession one would normally expect a wave of foreclosures of residential
property and a fall in prices. However this has not happened as governments
created funds to directly support both businesses and their employees to bridge
this period of distress. Additionally banks are also offering a repayment
holiday for business loans and residential and commercial mortgages for those
in need. As a result prices of resale property did not correct as much as we
expected. Although the financial support from governments and banks was needed
and much welcomed, it mainly came in the form of a loan or in case of the banks
a postponement of loan obligations. Thus the burden remains as these will still
need to be repaid in the future. Another reason why property prices held up
relatively well is the continuous positive articles in the international media
about Portugal as the place to be, also during the pandemic. Except for a few
cities, the Algarve predominantly consists of low density residential areas. As
such, and with a population eager to follow and obey safety measures, the number
of people affected by Covid-19 as well as the number of casualties are low in
comparison with other countries. In addition working from home has become more
acceptable than ever before and made possible by technological innovation. That
home office might as well be in sunnier climes like the Algarve. The demand for
long term stay accommodation in 2020 has increased confirming this trend.
So far the action
taken by central banks to add liquidity to stabilize financial markets has
worked. Stock markets are back again at levels seen before the pandemic started
and some are making new all-time highs such as the Dow Jones, S&P 500 and
Nasdaq indices. A good example of the unusual times we are living in is that
the yield on 10 year Portuguese government bonds turned negative in November
for the first time ever, down from 16.5% in January 2012 during the Eurozone
debt crisis. Bear in mind that Portugal is a country with a high debt to GDP
ratio of 135%. It is just another example of how the abundance of liquidity
created by central banks floats all boats.
The demand for hotel
rooms and self-catering holiday accommodation may have fallen off a cliff this
year. However demand for properties has not abated although transaction volume
was lower than last year due to limited supply and travel restrictions. It is
likely that in the future, maybe as early as Q3 2021, things normalize and
people will regain confidence to travel again.
Before the pandemic
started there was already an oversupply of savings versus borrowings. The
lockdowns and travel restrictions have led people to save even more as the
possibilities to spend money were supressed. This may continue for some time.
However, once things normalize and people are able to go about their normal
lives it is well possible that this will lead to a boom in consumption. With
similarities to the period after the 1st world war and the Spanish
flu pandemic last century, a period which lasted a decade and that is referred
to as the Roaring Twenties, then like now, people were very pleased to leave a
period of great uncertainty, anxiety and frugality behind them as the pandemic
came to an end and new innovations such as the automobile, radio, telephone,
electrical appliances made it seem that everything was possible. A period of
economic prosperity with new job opportunities. Now the innovation is
different, we need to make an energy transition away from fossil fuels to green
energy. We are at the beginning of The Internet of Things, making progress with
artificial intelligence and advances in medical science. The speed of innovation is
likely to accelerate as the long awaited EU corona virus recovery fund of Euro 750
bn is allocated to the countries. A large part will be used to invest in new
technology, the energy transition and infrastructure. In addition the ECB is
increasingly vocal about the necessity of governments to do their part to
stimulate the economy. Whereas a year ago governments in Europe largely ignored
calls for fiscal stimulation of the economy, now the taps are wide open to
fight the corona-virus pandemic. Portugal (Euro 9.2bn support for companies and
workers), France (Euro 45bn in tax breaks and Euro 300bn loans to businesses), Brittan
(GBP 330bn emergency loan guarantees and GBP 20bn fiscal support), USA ($2000bn
fiscal stimulus), Spain (Euro 100bn emergency loan guarantees), Germany (Euro 750bn
business and employee support) and Holland (Euro 40bn) are all using their balance
sheets to protect household incomes and prop up business activity.
In Portugal the 2021
state budget is currently under discussion and one of the proposals is that
properties which are registered under Alojamento Local no longer are subject to
capital gains tax when the rental activity is closed. At the moment it is
possible to avoid having to pay CGT when initiating a long term rental
agreement of 3 years or longer.
Eventually the
economic uncertainty will subside as vaccines will be made available during the
course of the year. It is tempting to believe that the end of the pandemic is in
sight, but vaccines are not a magic bullet. There is a long road ahead. Getting
back to normal is not an event but a process that requires time. However, the
availability of vaccines together with more testing and tracing offers hope
that we will be able to return to our normal day to day life in the future.
As far as the economy
is concerned we believe that the glass is half full and not half empty. If and
when needed not only central banks stand by to provide support but increasingly
governments too by deficit spending. Their mantra is to prop-up the economy and
keep people employed and to worry about reducing debt later. If they succeed,
and we think they will, it could put a floor under property prices.
The popularity of
Portugal as a place to live and holiday make us believe that demand for
property in 2021 will continue to be healthy. We are strengthened in our view
by the ongoing investments in various small and medium size developments, most
which do not make the news. There are also some large scale, eco-friendly
developments in the offing.
However we would not
be surprised to see another drop in transaction volume for 2021 due to the
supply constraints and travel restrictions for part of the 1st six
months of the year. Prices of resale property may stabilise during the course
of the year depending on the successful distribution, acceptance and lasting effectiveness
of Covid-19 vaccines.
Stay strong, healthy
and safe.
Robert Bijker
Director
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