Portuguese Real Estate Market Looks Subdued in the Near Term

Online, January 5, 2011 (Newswire.com) - Picture the Algarve with its sun soaked Mediterranean coast, warm, dry climate for most of the year, beaches after beaches of white, powdery sand, mountains and orange groves and it's easy to understand why Portugal continues to attract tourists in droves. Other popular tourist destinations are parts of the northern coast including Oporto and coastal Estoril, south of Lisbon. Great weather and natural splendour have also made Portugal a long-time favourite with second home buyers.

Encouragingly, Portugal's tourist industry has proved robust enough to survive the recession. According to figures released recently by the Bank of Portugal, the country has earned almost 6 billion euros in revenues from tourism during the first three quarters of 2010. This is good news for those with buy-to-let properties in areas popular with tourists.

Tourism apart, Portugal's economy remains sluggish. GDP growth in Q2 2010 was just 0.2% q-on-q and annual GDP growth for 2010 is expected to be around 0.5%. Against the backdrop of the recent sovereign debt crises in Greece and Ireland, Portugal's worryingly high public debt is discouraging investors. Credit rating agencies have downgraded Portugal's credit rating. In an attempt to trim its budget deficit, the government plans to limit public sector pay hikes, delay investment in the railways and cap tax deductions.

Overall economic weakness and the situation in other EU countries have led to an erosion of confidence, which is hampering the recovery of Portugal's real estate market. In mid-2009, house prices began looking up largely due to low interest rates and government stimulus. However, according to a recent report from the National Statistical Institute or INE, the average price of residential properties fell by 0.3% in Q2 2010. Algarve alone resisted the price fall, with the average price increasing by 1.9% over the previous quarter. Its splendid Mediterranean coast continues to attract second home buyers from cold, damp climates.

Property prices in Portugal have, however, not fallen as drastically as they have in neighbouring Spain. That's partly because Portugal did not experience the property boom that Spain and some other EU countries saw. Though prices are expected to fall further, nobody is expecting a freefall. There are some bargains available and prices of some properties are negotiable but only to a limited extent. In general, the Portuguese property market has not seen the massive price reductions experienced by the Spanish market. Premium properties in popular locations are still holding their value.

The most expensive residential properties in Portugal are in the Algarve and AM Lisboa where the average price exceeds 1,400 euros per sq.m. Centro and Norte are where the most inexpensive houses are located. Average prices here are below 1,000 euros per sq.m. In all regions including the Algarve, average prices are still below the peak they reached in 2007.

Estate agents and developers appear pessimistic about property prices in the short term as indicated by the RICS/Ci Portuguese Housing Market Survey dated October. With fewer buyers showing interest, the property market is faced with a situation wherein supply exceeds demand, causing prices to remain lacklustre.

Going into 2011, the real estate market is expected to be subdued and prices could fall further. Increasing unemployment, austerity measures and international concern over Portugal's worsening deficit are expected to depress real estate sales further. The mortgage market is growing at a very slow pace though interest rates are still relatively low. As most housing loans have variable rates, potential buyers are worried about future increases in interest rates. Also, lending norms have been tightened to some extent.

The economic situation notwithstanding, Portugal is still a pleasant destination for a holiday home. With prices relatively low and likely to fall a bit, 2011 could be an opportune time to go house-hunting in the Algarve or another region of your choice. Whereas short term returns are unlikely to be positive, there appears to be potential for decent medium to long-term returns on vacation homes in the best locations.

Points to note about Portuguese property transactions:

• Foreigners are free to buy property for personal use
• Those intending to purchase property for business or as an investment need a sanction from the Portuguese Institute of Foreign Trade
• A tax card and fiscal number must be obtained from the local authorities
• Buyer must nominate a postal address in Portugal for necessary documentation
• Those who buy community-managed apartments are required to purchase a proportionate share in the organization and to be responsible for the maintenance of communal areas
• Registering a deed costs 1% of property value and legal fees vary between 1% and 2%
• Stamp duty can go up to as much as 7.5% of the purchase price if the property is bought through auction