THE SUCCESS OF THE GOLDEN VISA PROGRAMME
Golden Visa investments represent more than €4 billion into the Portuguese economy. This influx of capital has a direct correlation to the massive inflation in house prices in areas such as Lisbon and Porto, where the majority of the GV investment is concentrated.
The Golden Visa program in Portugal has been a success when measured by total investment, diversification of investor base and origin, and the successful rehabilitation of abandoned urban areas.
THE NON-HABITUAL RESIDENT REGIME
Dovetailing with the GV program, the Non-Habitual Residence program, which is explained here, has reinforced the upward price movement. It is much more focused on attracting permanent residents who contribute to the local economy.
Residence under the NHR does not require the purchase of a property, with a rental contract being sufficient. Therefore demand for long-term rentals, and subsequently prices, has increased. Property owners were attracted by the allure of a constantly-improving tourism market and the arrival of wealthier, expatriate tenants. They registered rental properties with tax authorities at a faster rate than even that anticipated by the government. Long-term rentals, which attract higher tax and stamp duty, are much in demand by foreign applicants of the NHR program.
WHY REAL ESTATE IS SUCH AN IMPORTANT SOURCE OF REVENUE FOR THE GOVERNMENT
Real estate represents a major source of growth for the Portuguese economy. It has a knock-on effect on sectors such as tourism and construction, both labour-intensive. The country has achieved a rather unique result:
- it attracted investment, much of which at an average value well above previous transactions. Programs such as the Golden Visa had an inflationary effect on prices;
- the government “encouraged” (read, threatened) all owners of short-term rental properties to register them. Owners were encouraged to do so via initially low rental taxes. Accounting firms were also eager to generate additional revenue from this service; and
- it attracted expatriate residents eager to benefit from an exemption of personal income tax on foreign-earned income. This generated a major source of tenants for the newly available inventory, as well as buyers of real estate in their own right.
The government’s tax base (pool of taxpayers from whom taxes could be generated) grew significantly in less than five years. With Portugal suffering for many years post-2008 from a desperate need to generate inward investment to balance its books, these programmes achieved two important goals: an immediate injection of foreign investment into the local economy; and the widening of the tax base such that the sources of tax grew while the predictability of future revenues improved.
The Portuguese government has for years used real estate as a way of generating additional tax revenue. It is an easy source of income, and one which cannot easily (when compared to other asset classes) be sold. Stocks and shares, for example, which carry substantial exemptions on resale, can be quickly sold.
For those who monitor the market closely, changes to real estate related legislation have been predicted for some time.
CHANGES TO THE GOLDEN VISA AND NHR PROGRAMMES
Rumours about the possible revision to the zero-tax status of the NHR program started in 2018. Pressure on the government, which did not have a working majority, strengthened in 2019. Expectations were that any changes would only be implemented in 2021. But the government surprisingly introduced a proposal for a 10% tax, with a minimum of €7,500, for implementation in 2020. Although not expected to apply retrospectively, it will affect any new NHR applications submitted from around March.
That same pressure on the government also led to the sudden proposal for the abolishment of the Golden Visa in the greater Lisbon and Porto areas. This pressure also stemmed from years of complaints about overtourism, lack of access to housing for local residents, and the questionable value of the Golden Visa program beyond profits for real estate developers. The proposal garnered cross-party support. The message is that any legislative changes will not be retrospective but will apply to any applications from January 1, 2021.
Given these proposed changes, many people have asked us for our opinion.
WHAT WE THINK…
The first and most important thing we recommend is to allow time for the process to take its course. We recommend making decisions based on facts once Parliament has voted.
If you are considering a Golden Visa in Lisbon and Porto, either act quickly or put your application on hold. The threat of a potential change will always linger over these two large, residential markets. It is unclear what, if any, impact this may have on property prices, given the diversification of the market in recent years. But the Golden Visa has had a significant inflationary effect on property prices in these locations. Chinese buyers have been major contributors to this phenomenon.
Those who are seeking a Golden Visa investment without particular affinity for Lisbon or Porto, should immediately start to seek alternative options. Investors should classify themselves into one of two groups: those seeking the cheapest available real estate Golden Visa, might consider going north or inland; and those seeking an investment return should head south. Anyone who actually intends to spend more than the minimum requite time in the country, should overlay their personal preference of the regions of Portugal, on one of the groupings above.
Investors should be aware that agents, developers and sellers in regions outside Lisbon and Porto will naturally talk up their regions. Buyers should analyse fundamentals and ask for evidence. But they should not apply stricter criteria than they would have applied to Lisbon or Porto.
NOW IS THE TIME TO ACT…
Finally, we encourage investors to act quickly when you have the facts. While Portugal and the Portuguese can be quite dynamic and inventive, the country does not offer fiscal stability. Any decision should minimise the risk of future changes. Avoid overpriced purchases, buy properties with proven rental revenue history, buy in locations with resale values that have increased. Investors should also consider alternative approaches such as a small portfolio versus a single property. And for the more adventurous, development opportunities are still available in excellent locations.
The message here is change. Expect it, and do not be surprised when it happens. And more importantly, don’t be surprised when the change goes against you. If you are a pragmatist and understand that tax efficiency is the “icing on the cake” then Portugal continues to represent some wonderful opportunities, both in terms of investment and lifestyle.
* Disclaimer: a number of statements in this article refer to events which may happen in the future. The results may be exactly the same as, or completely different to, what is predicted. One of the objectives of this information is to make people aware of the possible changes. We encourage those interested to seek advice from duly qualified sources (of which Facebook is not one).