The changing portuguese real estate market ( Part 3 )

Emerging sources of clients, supply versus demand imbalances and much more.

The chasm between cost and access to accommodation by local people, and the cost of delivering new inventory

In a report by CIA Landlord Insurance in the UK, published in March 2022, Lisbon is ranked as the third least viable city in the world in which to live, if you are renting. This is due to the discrepancy between disposable income for local people, and the cost of housing.

The Portuguese government has no consistent policy to deliver new housing, much less affordable housing, on any scale. Delivery of Build to Rent, previously also known as PRS (private rental sector), inventory, is practically impossible due to, among other factors, the tax burden. At least 35% of the total cost of any new construction is tax (of which the most significant are: VAT of 23% on cost of construction; 1.23% VAT on sales agency commission; around 5-6% IMT; notary costs; fees and contributions, including compensatory payments, by developers to municipalities). This excludes the cost of bureaucracy and delay which are borne by investors as a reduction in returns, and may be transferred to end buyers via price increases.

Why will new build continue to increase in value (and price)?

In addition to the benefits of newer, more efficient, more environmentally considerate technologies and materials, all of which come at a price, there is also the cost related to the process of developing a new project. As comment by a senior executive at a leading real estate consulting firm in Portugal: challenges include “high property taxes, VAT, and the sheer time it takes to get planning permission from city halls and local councils. This, in turn, makes it impossible for developers that normally plan ahead by up to 10 years, to keep to their original costings and budgets, thereby scaring off investors in this particular residential housing segment.”

The Portuguese Property Survey (PIPS), produced by the magazine Confidencial Imobiliário and the APPII, in May of 2022, reported that there had been an “increase in construction costs of 18% over the past year”. This cost will have to be passed on, in part or in full, to the end buyer.

A combination of existing lack of product, low levels of new build, an increase in labour and materials costs, high tax and slow planning cycles, mean that it is impossible to deliver affordable new build. Any new build that is perceived as cheap should immediately raise a red flag.

As most of the underlying causes of cost are structural and not easy to fix quickly, and consequently with new build prices expected to continue to rise, the Portuguese off-plan market presents an excellent opportunity for investors, both institutional and retail (end buyers). Residential developers willing to spend the time can benefit from uplift in land values when successfully taking a project through planning, and end buyers can benefit from higher-than-average ROI and ROC because of capital appreciation during the build cycle. This is sensible foresight based on sustained demand for end product, rather than the speculative type of investment that characterised the years prior to the financial crash of 2008-9.

The need for urgent change across the sector

The current inflationary cycle means that developers are naturally more risk-averse, as are buyers. In a conversation with a large real estate consulting company recently, I was surprised to hear an experienced executive imply that he expected developers to underwrite the risk of a volatile market so as to offer greater buyer protection. He seemed to fail to recognise the substantial risks already undertaken by developers, many of which are difficult to quantify to an end buyer without laying bare the hugely prejudicial environment in which developers operate in Portugal. The opinion also seemed to contradict the so-called “appeal” of Portugal. If a country is indeed such an attractive investment destination, then surely a more balanced approach between developer and buyer risk must be adopted?

The combination of factors (or challenges) outlined above, make it “impossible to create new build projects at affordable prices for Portugal’s lower-middle and middle classes.” As we have been arguing for some time, eon way to inject more affordable product into the Portuguese market, is to approve, develop and sell more expensive product such that a percentage of larger schemes can also deliver an affordable housing component. Many ways exist to do this, such as waiving VAT (or applying a reduced rate of VAT) on the affordable housing component of any development; encouraging developer-buyer shared ownership schemes by waiving IMI and offering reduced VAT on new build; or reducing IMT on new builds that meet certain environmental or other criteria, they have a secondary positive effect on helping to meet other government targets.

It is even possible for the government to link VAT to inflation in an inversely proportional ratio, such that VAT is capped at the moment of project approval, at the prevailing rate, but then falls in line with inflation as and when costs are incurred: the logic is that if costs go up then the government will still earn its tax as per the original estimate – after all, with no value whatsoever being received by the developer in exchange for VAT payments, it seems at best grotesque that the government should benefit while consumers and economic agents suffer. A similar situation exists in respect of fuel duty in Portugal, that could benefit from a similar inflation-linked VAT solution.

Ultimately, if the government is unwilling to sacrifice its tax revenue, then it must offer developers, who are taking most of the risk, incentives for them to build new product.

What is evident is that development models will have to change and for this to occur and the roles of the protagonists will have to be remapped. Some examples of the possible trickle-down effect:

  • The government needs to reduce the tax burden on real estate development, starting with VAT
  • Councils need to start adding more value, beyond simply having the power to approve projects and ask for contributions. The council must deliver value directly to the local community, in exchange for the revenue it receives from developers.  The percentage of monies received from developers that is used for general municipal expenses should be capped, and the remaining amount ring-fenced for direct investment into the local area of the development
  • Developers need to promote and build products with a client type in mind. Generic products with little focus or differentiation will slowly disappear
  • Banks need to undertake project-based risk analysis, not cross-collateralisation. If a project does not stand on its own merit, it should be turned down. This means banks recruiting industry experts who understand sectorial context and end buyer behaviour, rather than just bricks and mortar
  • Buyers will need to change their mind set from the transactional to the context-driven aspirational. Over time, mini “joint ventures” or collaborations with developers should be allowed to develop, creating a shared objective approach
  • End user finance should become increasingly flexible – we are already starting to see some solutions emerge in this area
  • Real estate agencies should improve efficiency, with technology less of a differentiator due to universal access. As a result, real estate companies should be able to reduce their operating costs and consequently drop their levels of commission, contributing to lower transaction costs. They should be able to change their remuneration model, moving away from the commission-only model, to paying (at least in part) base remuneration, improving levels of quality in the sector, greater job security and ultimately more sales (and therefore inward investment). This will be reflected in a greater level of certainty which is of huge importance to alleviating pressure on social care, healthcare and associated sectors
  • The Manpower Group’s May 2022 talent shortage survey demonstrates that Portugal is the world’s second most difficult recruitment market, with 85% of companies reporting difficulties in filling positions. Given that there is an abundance of qualified and indeed talented human resources in Portugal, it is clear that matching supply to demand is as much an issue in the human resource space as it is in the real estate sector.

 

In the Algarve, employers who continue to promote heavily seasonal employment will soon need to factor in the higher accommodation costs during the summer. In particular, those companies attracting non-resident, seasonal resources will soon be forced to contribute to the cost of housing during the competitive peak season, failing which the remuneration may simply not be sufficient to allow seasonal labour to move for the short summer. These shortages are already being experienced in other markets with similar seasonal characteristics to the Algarve.

Conversely, employees and workers need to adapt their thinking to a challenging reality for all protagonists in the real estate sector. Those who are or wish to be real estate agents should be ready to commit to sales targets and to be measured on results. The mentality of real estate sales as a quick and easy way to make money, or for someone to turn to when desperate for a ”filler” job, must disappear. Likewise, for companies looking to work with talented individuals, basic aspects such as paying out of pocket business expenses and the payment of competitive commissions must form the basis for attracting new talent.

 

 

 

 

The changing portuguese real estate market ( Part 2 )

 

Emerging sources of clients, supply versus demand imbalances and much more.

 

 

The increase in the presence and importance of the North American market

The Portuguese borders agency, SEF, has reported a large growth in US citizens choosing Portugal as their residence. While admittedly from a tiny base, the growth of this market underscores the increase in relative wealth of the average person seeking Portugal as their new home. Even those Americans who only receive Social Security payments, are receiving a pension substantially above the Portuguese average. The Canadian market is equally important, because a number of Canadians of Portuguese descent are seeking a return to their roots, and although the Canadian dollar does not represent the same purchasing power as the US dollar, incomes are substantially above those in Portugal. The USD and CAD have appreciated 20% and 14%, respectively, over the last year.

As Bloomberg reports, “retirees and the wealthy have traditionally been the prime buyers of real estate in Europe. But relatively cheap housing — particularly in smaller cities and towns — and the rise of remote work have made the continent alluring to a wider range of people, including those who are younger and find themselves priced out of the housing market at home. Growing crime rates in some US cities and political divisions have also led Americans to look across the pond for a quieter lifestyle, buoyed by a euro that just dropped to parity with the US dollar for the first time in more than 20 years.”

The effect of the supply and demand imbalance

Essential Business, in an article in July 2022, cites that the “residential segment, which today is highly dependent on real estate development (new build) is Portugal’s weak point at present, with the number of units absorbed by pre-existing products (second-hand) in the market far more expressive when compared to new products, owing to an absence of sufficient new stock in the market. The new build market has flatlined since 2011.”

In an article, also in July 2022, published by the idealista portal, it is reported that there has been a 25% decrease in available inventory over the preceding 12 months. This problem is most acute in the Algarve problems, where supply has diminished 37% year on year.

Although rents have also gone up in value, they have not done so by the same margin as sales prices. For this reason, and despite the perception that rents have become expensive relative to 2010, they are still more competitively priced in 2022 than properties for sale.

 

The changing portuguese real estate market

EMERGING SOURCES OF CLIENTS, SUPPLY VERSUS DEMAND IMBALANCES AND MUCH MORE

 

The growing popularity of Portugal

Some would say that it is ironic that the international market and investment has done what Portugal and the Portuguese could not find the courage to do themselves, namely value their patrimony fairly. With decades of cheap real estate culminating in the financial crash of 2008-2009, the Portuguese were extremely hesitant in making investments in the real estate market of their own country. Accustomed to seeing the dramatic effects of global crises reflected in extremely difficult local market conditions, the majority of the population remained sceptical when the first signs of a recovery when noted around 2014. As international investment grew, bolstered by programmes such as the Golden visa and the non-habitual resident programme, real estate prices rapidly increased, and by the time most Portuguese had gathered enough courage to act, most had been priced out of the market.

The effect of Portugal’s popularity on real estate prices

According to a report compiled by Idealista, Portugal prices have increased 70% in 10 years (2012-22), much higher than the European average of 45%.

The source of growth

As an example, Savills’ World Cities Prime Residential Index, which includes 30 cities around the world, ranked Lisbon as the 7th city where prices had grown the fastest in the first half of 2022, at 3.7%, versus an index average of 2.4%.

The role of foreign direct investment (FDI) on Portugal’s real estate market

Although the cyclical nature of real estate markets (and indeed economies) is acknowledged, this decade-plus cycle of sustained growth in Portugal, largely independently of a pandemic, a war and of somewhat depressed internal demand, seems to indicate something different. Given that Portugal’s internal market is largely unable to sustain such growth, due to still-low salary levels (and consequently limited disposable income) and small size, it is the international market and foreign investment that has been the main driver of this trend.

Backing up this opinion is a quote in Essential Business in July 2022 that confirms that “in 2012, as Portugal was still in the depths of the Great Recession, 46% of investment in Portugal came from overseas, today that figure has shot up to 85%…the overall investment in real estate development in Portugal, in 2016, was €200 million of which less than 50% came from overseas investors. That figure has shot up to an incredible €375 million in 2021, a year in which the world was still affected by the pandemic.”

The National Institute of statistics reports that investment from EU countries increased by 72.3% in Q1 2022, while foreigners buying from non-EU countries increased by 79.1%. In total, foreigners acquired 2556 properties in the first quarter of 2022.

At a granular level, what we observe is the increase in wealthier investors and buyers, meaning that competition for product is greater, prices tend to increase and demand for the upper and luxury segments of the market including new build, remains fairly buoyant.

One of the reasons for this is the trend described in the Henley global citizens report 2022 which shows that Portugal ranks in the top 10 countries expected to receive new millionaires during this year, approximately 1300. New World Wealth shows that Portugal 4, for example, has been one of the most popular destinations for the flow of HNW capital, capturing some of the 4500 high net worth South Africans that have left the country in the last decade.

Bloomberg UK also quotes a Savills report stating that Lisbon, together with Miami and Dubai, is ranked as the top city for high earning remote based talent, specifically senior staff.

Changes to the Golden Visa and Non Habitual resident programmes

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).

Planning for the Golden Years

Planning for the Golden Years:
the modern-day “Gold” rush in the California of Europe

 

Anyone who is nearing or at retirement age wants to protect his or her hard-earned pension. Many want to do this in a safe country with a warm climate, friendly people and a great lifestyle.

Equally, many people from outside Europe aspire to have free access to, or live on, the “Old Continent”. As do those who have a highly mobile lifestyle but want a base in a low-tax environment.

Now one country has made it easy to do all the above.

Racking up the accolades

World’s and Europe’s Leading Destination 2017. 3rd safest country in the world. 7th friendliest people. 12th best healthcare. World’s best golfing destination. Europe’s best beach destination. Lowest cost of living in Western Europe. Lowest property purchase taxes of any Southern European country. Near the top of the rankings in the Quality of Nationality Index meaning its passports makes it among the best options for visa-free travel.
Portugal. The ugly duckling turned swan.

A few years ago, no one wanted to touch it. The IMF was bailing it out. The English were calling it names – one of the PIGS. Even the Prime Minister publicly encouraged its youngsters to emigrate (interestingly, many are now returning, with half a decade of additional international expertise to offer their land of birth).

Now, fastest growing European economy in Q1 2017. Eight years of record-beating tourism numbers. New host of the Web Summit, the world’s premier IT and emerging technology investment conference. Land of the birth of the President of the European Commission, President of the Eurogroup, and the UN Secretary General. 10th largest exclusive economic zone in the world, 97% of which is sea. A country punching above its weight.

golden years

Whimsical waves: a replica caravel sails over tranquil waters along the pristine Algarve coastline near Benagil And home to Europe’s most popular Golden Visa program.

The most golden of Golden Visas

Why, you may ask, if Spain has several times more visitors than Portugal and there are more Spanish-speaking people in the world, and if Greece has a Golden Visa investment level half that of Portugal, has this small country on the Western edge of Europe become the most popular destination for those looking for residence in Europe via investment?

golden years

The reasons for the approximately €4 billion invested in this program to date are varied and many:

⦁ In addition to the Golden Visa itself, the Portuguese nationality and passport, are highly sought-after. With visa-free travel to 157 countries, a Portuguese passport is among the world’s top 5 for hassle-free travel;
⦁ Portugal has 79 double tax treaties signed with other nations. This is relevant because it underpins the country’s highly successful NHR (Non Habitual Resident) program, which broadly allows eligible applicants to pay no tax on any foreign-earned income (including pensions);
⦁ Portugal has no wealth taxes (except for a newly implemented real estate tax for individual property ownership greater than €600K (based on fiscal value which is generally lower than market value or purchase price) or joint ownership above €1.2 million)
⦁ There is no inheritance tax and owning property in own name is very efficient
⦁ Property is sold freehold, with rare exceptions. The land registry is among the most reliable in the world. Property is fully documented and protected
⦁ Permanent right to reside after 5 years (with no requirement to reside, unlike Spain and Greece)
⦁ Easy family aggregation providing the family with the full right to reside, work and study
⦁ Very few nationalities are “excluded”: it is the analysis of the person’s individual circumstances and history, together with the source of funds, which are relevant to any application.
The Portuguese Residency by Investment (better known as the Golden Visa) was launched by the Portuguese government in October 2012, but only saw its first approved candidates in the second half of 2013. It is a fast track method for foreign investors from non-EU countries to obtain an authorisation to reside in Portugal and can be summarized as follows:
⦁ Permanence requirements include 1 week in the first year and two weeks in every subsequent two-year period. Applicants are free to travel within the Schengen vis travel area
⦁ First entry must be via a valid Schengen visa or visa waiver program
⦁ Applicants have the right to work if they wish
⦁ Citizenship and a Portuguese passport can be obtained after 5 years of residency. A basic Portuguese language test must be passed
⦁ Applicants must not have a criminal record, be banned from entering the country or be flagged in the Schengen system
⦁ Initial application fees are around €5,200 per family member with two-yearly renewals at 50% of that value. Legal fees can be just as high but many smaller solicitor firms and other expert partners are able to deliver this service for a much lower cost – in some cases absorbing it into their conveyancing fee. Find a local partner who can make suitable introductions to a range of experts.
The most popular route to investment is via the purchase of real estate, under the following rules:
⦁ Standard investment is €500,000, sourced from funds brought from outside Portugal without recourse to credit or debt financing. Any amount above the GV threshold may be financed
⦁ Any type of real estate qualifies. Shared or co-ownership applies as long as the minimum threshold is met per investor
⦁ A reduced level of €350,000 for approved rehabilitation projects in properties of at least 30 years. The criteria for qualification are strict and for most investors this is not a practical solution
⦁ Either of the above levels maybe reduced further by 20% if located in a low population density area. An excellent opportunity exists in key municipalities in the country, one of which is discussed in this article
⦁ The Golden Visa investment can be sold after the 5 year period

Setting out your stall and claiming your stake

Just as those who trekked across the US to find fortunes in California depended on staking their claim to the right plot of land, so too selecting the right region for investment is crucial in Portugal. Factors such as ease of resale, likelihood of appreciation, and rental yields, must be taken into account before deciding where to invest. Crucially, if the property is to also become a family holiday home or a permanent place for work or enjoy your golden years, then a match to holiday requirements for the family, to airports with good international connections or to a place which offer a balanced lifestyle and cost, must be factored.

golden years

Experience has shown that most, if not all, who visit it will fall in love with something: those from Canada and the US love the authenticity combined with first-world infrastructure; those from Latin America see the gateway to Europe as an opportunity to have a foot in Europe while retaining traces of home, including a similar language; those from Asia are impressed by the family-friendly environment and the openness to multiple cultures.

But beware Portugal’s beguiling charms: not every region is a match for every investor. Tourism is one of Portugal’s largest industries and exports and there is a reason why the Algarve and greater Lisbon are, respectively, the two largest tourist destinations in the country.

Sunshine is a main factor. And the further north one goes, the less you see it, especially in the rainy winters. So even if you are enamored with the Douro valley, spanned by myriad bridges and traversed by port-wine bearing barges, consider whether you will accept gray skies in the winter and less intercontinental airline connections.

People. Another major driver. While you may fall in love with an inland area such as the beautiful Alentejo, with its world heritage sites and golden fields of barley, it is an area with small villages and with low population density. Great for buying cheaper properties but not great to obtain a yield. Greater travel distances. Less English spoken. Very quiet in the winter.

Planning your approach

Keep your options as open as possible. If you are looking for a Golden Visa and residence, then stay as close to the purchase limit as possible. That way, you ensure that you are able to resell or, if you need to keep the property, you will stand a better chance of not being out of pocket.

golden years

Look for reduced investment Golden Visas, avoiding areas which have seen huge price increases. Look for regions which might still be undervalued. And most importantly, if you want to generate revenue, look at where the source of demand is.

David vs. Goliath?

Lisbon. Nation’s capital and center of government and power. A fantastic weekend destination, with plenty of historical monuments, culture, gastronomic options, cheap travel and excellent beaches not far away. Great for workers, especially mobile ones. Pretty good for retirees if you don’t mind the hills, are happy to take safe and cheap public transport or hop in an equally inexpensive cab. Best range of healthcare options.

golden years

One problem: a booming real estate market that is starting to look very much like a bubble. Think Golden Visa. Add exploding Chinese middle market. Overlay with a €500,000 Golden Visa limit. Net result: any owner of a 2-bedroom apartment in the city thinks they can ask for €500,000 from a foreign buyer. Local buyers don’t even bother trying to buy those types of properties anymore.

The Algarve. One of the world’s top tourist destinations. Portugal’s number 1 spot for both national and foreign visitors. Great for sports lovers: walkers, ramblers, surfers, golfers. Excellent for fish and sea food lovers, but then again, so is Lisbon. OK for culture. Good set of public and private healthcare options.

Two advantages: much better bang for your buck in real estate terms. And better weather.

Algarve: Best Place in the World to Retire

The tourism crown jewels are the country’s southernmost province, the Algarve, with beaches of golden sands, cliffs of golden light and sea of azure that many mistakenly think is on the Mediterranean. Even the cool Atlantic seems to be warmer in the Algarve, voted seven years in a row “Best Place in the World to Retire” by the Overseas Retirement Index.

golden years

The Algarve has mostly been overlooked until now as a destination for the Golden Visa, primarily for the following reasons:

  • Those nationalities showing most interest to date, namely Chinese and Brazilian, who have jointly invested almost €4 billion, want urban locations such as Lisbon;
  • Many who like a more suburban feel, such as South Africans, Americans, Turkish, Russian and the remaining Brazilians, have been shown Cascais by local agents. Only some investors have managed to remain at the €500,000 level due to the upmarket locations and property which are being shown. Investors are almost inevitable being upsold into spending more than the required amount;
  • With Lisbon prices climbing to historical highs and buyers priced out of the market, the Golden Visa wave has broken on the shores of Portugal’s northern city, Porto, which has seen its real estate prices also rise dramatically;
  • The first wave of GV buyers was looking for new or recently refurbished properties. As the country has seen new construction at a standstill since the 2008-9 crisis, there has simply been insufficient inventory available. The Algarve reflects this situation, with new-build properties representing a price per square metre at the very top end of the national average.

However, the region offers a very interesting variety of Golden Visa options and much more variety, in our opinion, than any other highly desirable location in the country. With the Algarve already the country’s top tourist destination and the region’s economy relying heavily on this sector, Golden Visa product should not affect the local residential market nor disproportionately inflate prices, as has been the case in the Lisbon and Oporto markets, because its appeal will continue to be to the foreign market. In fact, the Algarve’s Golden Visa product should increasingly act as a catalyst for the injection of more investment into the region’s tourism sector, by diversifying the “simple” €500K which has typified the region to date.

Research and knowledge: your pick and shovel

If the residence visa is your main aim, stick to your objective. Numbers first. Many beautiful villas can stretch your budget by hundreds of thousands of Euros. And there is always a more beautiful and more perfect property to be found.

Choose a partner who will be aligned with your objectives and budget. Consider entering into a buyer agreement with someone who can work for you rather than earning their fee from the seller.

golden years

If you are thinking of settling, ensure you take a Discovery Tour. Get an experienced company to show you the areas and examples of real estate within each, before taking the plunge. Rent before you buy if you are not sure. Ensure that you have found a place where you can live in the quieter winters and the busier summers.

Be aware of the regional subtleties:

⦁ Higher yields are more difficult to achieve in the greater Lisbon area because prices are higher (even though rentals are also higher)
Properties in the Algarve come furnished, increasingly to a high standard. Lisbon properties are unfurnished unless specifically set up for short-term lets
⦁ Lisbon is a year-round destination even though the winter is slower than the summer. Either weekly lets or annual lets are the preferred model. The Algarve still experiences great variations between summer and winter. But as properties are furnished, weekly summer rentals can be combined with monthly winter lets for maximum return.

his is realistically only possible in the Algarve.

Eldorado: combining location with value for optimal Golden Visa value

With Lisbon overpriced and good deals increasingly difficult to find, the Algarve should at least be on investors’ short-list. The key should be to look for good value for money opportunities. The Algarve is a narrow strip of land where most of the development is concentrated near the coastline. The main factors for optimal value in the region are proximity to the coast (15 minutes maximum, less is better), distance to golf course (again, near the coast and you are guaranteed to be within 15 minutes of one) and being south of the region’s A22 highway.

golden years

When overlaying this with quality real estate or modern or contemporary construction, many of the region’s properties are priced well above €500,000. Well known for the extremely exclusive (and equally pricey) real estate is the Golden triangle which encompasses Quinta do Lago and Vale do Lobo, where two bedroom apartments are easily between €650,000 and €1 million, and a 3 bedroom villa worth millions of Euros. Upmarket areas such as Vilamoura, Carvoeiro and the Lagos municipality are less expensive but all of them still require a minimum €500,000 Golden Visa investment.

Travel to the province’s western-most municipality, most famous for Henry the Navigator’s maritime school in Sagres and the country’s second most popular surfing location, and you will find an area of stunning natural beauty, of imposing cliffs, mile-long beaches and one of the country’s largest natural parks along the Costa Vicentina. Because its natural landscape is mostly untouched by large-scale development, the number of residents is still low.

Therein lies the opportunity for Golden visa applicants: in low- density population areas the investment threshold is reduced by 20%, to €400,000. In this region, some stunning Golden visa opportunities exist. Quality contemporary properties; resorts (including golf resorts) with multiple services; and amenities and well-located properties perched atop coastal villages, offer excellent opportunities in a region which combines natural beauty and proximity to wonderful beaches, with the benefit of the Algarve’s tourism growth.

golden years

The municipality continues to benefit from the Algarve’s eight years of record-beating tourism as well as the demand by permanent residents, many of whom retirees, for sunshine, great lifestyle and low taxes / cost of living.

Examples of the great Golden Visa deals on offer include a fully furnished executive 3 bedroom golf course villa, with shared pool, expansive golf views and access to a wide range of amenities including golf, on-site restaurants, spa, and tennis, for under €415,000 and which comes with a fixed guaranteed income in the first year. This property, well managed, can easily generate a gross yield of 6-7%. A smaller 2-bedroom property on the same resort with two years of guaranteed 5% revenue is for sale at €400,000.

Just down the road, luxury 4 and 5 bedroom villas on a leading eco-resort can be bought for between €400,000 and €500,000. It is also possible to “package” up several plots, complete with full planning, which can be held for later resale or used to build single-family villas or townhouses.

Finding residence, lifestyle and solid investment is very much possible if you know where to look! Enjoy your golden years the best and smartest way!

Annuity Failing You? FIXED-INCOME Care Suites

IS YOUR ANNUITY FAILING YOU?
CONSIDER INVESTING IN FIXED-INCOME CARE SUITES

 

It was the day after the referendum of June 23rd 2016 that I realised that my British Pounds would not buy me as much as the day before. In fact, about 20% less, although that has now “recovered” to 15%!

Suddenly, travelling to Europe, living my retirement in Europe and even making my hard-earned British pension stretch had just become 15% more difficult. And much less predictable than before. Worse, since the referendum, inflation in the UK has risen to around 3% which means that the pitiful returns the banks are giving us on our own money, typically less than 1%, are eroding our capital. Each year money in the bank is worth less.

There is a simple distinction between working life and retirement: in the former, we work for money, in the latter money must work for us so that we can enjoy our later years. Many retirees have been let down by underperforming annuities, a depreciating currency, and most recently higher inflation. All this means that the quality of life in later years is at the risk of getting worse. It is therefore crucial that everyone think seriously about how to protect and grow their retirement pot.

Expat retirees with a new life in Southern Europe still have family or financial links to the UK. Not everyone is comfortable severing all links with the UK. With Brexit looming, a majority of those retiring abroad are wondering how to ensure they retain rights and protect income in both the UK and EU.

Dealing first with the question of right of residence in the EU: even if no deal is reached between the UK and the EU, from a procedural point of view, a “cliff-edge” Brexit will place the UK in the same category as those applying to reside in Europe, whose origin is outside the EU. Such applicants need a visa to enter the area and to remain as residents. In countries such as Spain and Portugal a Golden Visa category exists which allow people to invest in exchange for residence.

While it may be difficult for expatriate residents to apply to be “new residents” in a country where they have lived for some time, it is very feasible for expats in Spain to seek, for example, residence in Portugal, with those who are eligible also applying for tax-free status, a way to protect and maximise pension payments. One of the criteria is not to have been resident in Portugal during the last 5 years.

Expat retirees will also want to make sure that their assets, savings and income in the UK are maximised. However, in later years, our appetite for risk (understandably) decreases. With this in mind, and with many financial groups admitting that annuities do not deliver viable long-term solutions, the search is on for alternatives.

One sector of the market presents interesting opportunities for capital protection and steady capital growth. A sector which most expats in Southern Europe understand: social care.

Currently care in the UK is privately funded until one’s estate is worth just £23,000 (this is under discussion). Care home places are limited, means-tested and include value of your home. Retirees often need to sell their home to fund care. Most residents in care homes have a life expectancy of a further 10-15 years, creating long waiting lists. Care home occupancy is currently running at almost 90% and fees average £700 per week.

FIXED-INCOME CARE SUITES

In the UK, 8 million people will be aged 80 or more, and 1 in 4 people will be 65 or more by 2050, double current levels. The failure of small care homes due to a number of factors including rising costs (which will be exacerbated when the UK leaves the EU), create knock-on effects leading to problems such as “bed blocking”. There is huge pressure on existing care homes and an urgency to create new care home places.

As a result, a number of companies have taken on the refurbishment of old or abandoned care homes, or are improving operating facilities.

This new wave has created the opportunity for individual investors to become part of the social care revolution. With investment levels typically in the £50,000-£100,000 range, this sector is accessible to most retirees with a pension pot.

For some it presents the opportunity to use their 25% tax-free draw-down in exchange for a fixed income which is much higher than an annuity. For others, it may make sense to release equity from a debt-free primary residence to ensure that assets are growing at a faster (and more predictable) rate than the currently stagnant housing market. For yet others, it may mean that some money released from selling a primary residence can be invested while the rest can be used to move abroad.

The returns from these investments range between 8-10% per annum, after costs, which is substantially higher than most other real-estate backed investments. This is a relatively low-risk investment given the demand described above. Importantly, it targets a sector which retirees understand. After all, we will all at some point need care.

With a fast-changing world, it is important that expat retirees consider not only ways in which they can efficiently manage their lifestyles abroad, but also protect their assets and sources of income in the UK. A combination of tax-free retirement abroad and fixed-income investments at home might just be the winning combination.

Making The Right Property Choice

Making The Right Property Choice

Start With A Rental

The Algarve is a popular summer rental market. A range of options exist in both municipalities. Long-term rentals represent a small percentage of the total rental market and private apartment and villa rentals, whose owners often only place properties on the market as an afterthought following a poor summer season, compete with long-stay hotel accommodation that offers various guest services that are not available in private property.

Private rental is often a cost-effective and flexible way to have time to make permanent decisions. However, most rental properties are summer rentals—the most popular rental sitesn continue to be large property portals such as Homeaway, Holidaylettings, and Rightmove Overseas—and owners attempting to advertise properties as winter rentals inflate prices to hedge any loss of summer rentals. As a general rule, the winter rental values of properties in popular tourist areas are similar to the weekly values in the summer. A quick analysis in the area of Lagoa and Silves using a specialist long-term rental site bears out this observation, with long-term rentals of a studio apartment in Carvoeiro at US$946 per month and a 2-bed apartment in Silves at a well overpriced US$2,330 per month. The disadvantages of rentals negotiated directly with private owners include isolation, a lack of support in the initial phases and difficulties in dealing with the initial bureaucracy involved with any new country move, often exacerbated by the lack of knowledge of the local language.

An easy-access property rental for the 50+ market

Historically, many visitors moving to the area, including firsttime visitors, have opted for purchasing real estate as a way of securing their permanence in the area. While this remains a popular option, the market is changing. The economic crisis of 2008 and the knock-on effect on the liquidity of the real estate market means that many people find themselves locked into a permanent solution while their personal circumstances demand ever-more flexibility. Many existing expatriates and prospective new ones say that if they had the choice they would not buy a retirement home or would at least experience living overseas, if possible within a community, before making a permanent move. Two groundbreaking rental projects will launch in the Silves and Lagoa area, which will reinforce their reputation as leading expatriate retirement destinations. The Algarve’s, and one of the Iberian Peninsula’s first senior (50+) communities, with which I am involved, will begin operating in the fall of 2014, in the town of Carvoeiro. Aimed at the independent living market, it will offer a range of 4-star accommodation, and guests and residents will be able to choose from a 1-month try-before-you-move option, a 3-6 month winter stay, or permanent residence (including the possibility of opting out during the peak summer months). You can read more about the project at Algarve Senior Living (www.algarveseniorliving.com).

Expected to launch in 2017, a bespoke-developed senior village backed by a major Scandinavian group, will be developed less than 2 miles from the center of Silves on a 60 hectare (150 acre) site. A care home to cater for the increasing health needs of residents, will be included in a future phase. With the variety of options on offer, and direct flights from dozens of global destinations, there is simply no excuse for not trying out the Southern European lifestyle before taking the plunge.

A list of short-term rental providers is in the Algarve “Rolodex.”

Real Estate

“Recent authoritative research by the OECD,” as reported by the Telegraph, “highlights property markets in Portugal” as “a bargain” and “undervalued.” Portugal’s property market is well-established. There is no restriction on the purchase of real estate and most land and property is sold freehold. The country’s property registry system is centralized and very reliable. The law protects property, property rights, and the right to access and use one’s own property.

Property buyers pay property purchase tax (Imposto Municipal sobre as Transmissões – IMT) on a sliding scale based on the property’s taxable value, which has historically been lower (and often significantly lower) than actual values at which properties are transacted. In recent years, this gap has reduced as the government has revalued properties in order to capitalize on an obvious source of tax income. The table below illustrates the values payable for each price interval, depending on the type of property.

Condos for sale in Presa da Moura, Carvoeiro

Land is taxed at a flat rate of 6.5% when it is rural or has nothing yet built on it.

Stamp duty is 0.8% of property purchase price. Annually, municipal taxes (designated IMI or Imposto Municipal sobre Imóveis) are charged on properties using a formula containing variables which include the size of the property, and how many luxury or entertainment items (such as pools, tennis court, etc.) it contains. Each municipality has the right to charge a slightly different IMI value, which range from 0.3-0.5% with rustic buildings (whose taxable values are normally very low) paying a value of 0.8%.

The Algarve was launched as a ‘Mediterranean destination’ in the 1960s and the town of Carvoeiro, located in the municipality of Lagoa, is one of the most popular resorts for foreign property buyers. Today, there is a range of real estate available, both new and resale, mainly 2- and 3-bed apartments and 3- and 4-bed villas. However, a studio apartment starts at around €70,000, a 1-bed apartment from €90,000 and a 2-bed from around €100,000. One-bed cottages, which are scarce, start at around €150,000, 2-bed resale townhouses from around €190,000, sea view 2-bed townhouses from around €225,000, and 3-bed villas from €275,000. A private villa on an acre of land with private tennis court and pool, and established gardens, can be purchased for €850,000. Fractional real estate in the area starts at around €50,000 for a quarter share of a 2-bedroom apartment on a golf course.

Apartments property for sale in Silves

In Silves, new or nearly new 1-, 2-, or 3-bed apartments vary between €80,000 and €140,000. Villas start at around €350,000, and most have at least half-acre plots. Rural properties have large plots and even large urban plots with ruins and planning permission to build can be found at competitive prices. A 20,000-square-meter (five acre) plot with some sea views, containing a ruin and permission to build a house of up to 464 square meters (5,000 square feet) plus terraces, costs less than €500,000.

Mobile Home Paradise

In a survey of motorhome owners, the Algarve was voted best motorhome destination in Southern Europe and Northern Africa (including Morocco). And Silves has gained the reputation of being the motor home capital of Southern Europe. Hundreds of motorhomes, from as far afield as Denmark, the UK, France, and Germany mix with the occasional Portuguese traveler to create a virtual community numbering as many as 350 vehicles. There have been some recent incidents of motorhome users being ordered by local police to leave, due to what they considered abuse of local health and safety rules, and parking in unauthorized zones (there are local licensed sites which include water and waste disposal facilities, as well as a Laundromat, for as little as €6 per day. Nonetheless, the majority of this community of people who spend up to five months in their motorhomes in Southern Europe and some of whom have visited the area as many as 11 times, are law abiding and respect local rules and take care to exhibit good manners in sharing space with other expatriate neighbors. They make a significant contribution to the local economy during the quiet winter months, frequenting local restaurants and shopping at local grocery stores and the Silves market.

Southern Europe’s best motorhome destination

Tax And Financial Matters

Portugal has no inheritance tax; if you rent a property you will also not be liable for any wealth taxes, which only exist in the form of annual property taxes on real estate which you own. Anyone who has not been resident in Portugal for the previous five tax years is entitled to obtain residence under the Non- Habitual Resident law, which entitles most people to receive pensions and foreign income tax-free for 10 years. Under the same law, for any professions included on a list published by the government and which includes company directors, accountants, IT professionals, engineers, architects, people in the medical profession etc., the personal income tax rate for any work conducted in or billed from Portugal is capped at 20% (plus any surcharge due to the fiscal emergency measures, totaling 3.5% in 2013). This is well below the maximum 46% top tax bracket in the country. The procedure to register as a NHR involves registering with a local tax office and providing simple supporting information. (See “Becoming A Resident” for more details.).

Portugal has a double tax treaty with the US (signed in 1996) and with Canada (signed in 2001).

The strength of the euro versus the U.S. dollar in recent months has eroded some of the competitiveness of local prices from the point of view of arriving US visitors, but as exchange rate fluctuations are constant, anyone considering emigration should plan their currency requirements well in advance.

Sales tax (Imposto sobre o Valor Acrescentado – IVA) is charged nationally, based on the type of product or services. IVA rates are high, ranging from some zero-rated services to 6% for basic products and 23% at the highest tier. IVA is included in all products and services. However, due to the high rates, some service providers do not issue a formal IVA-compliant receipt unless specifically requested to do so. In order to combat this tax avoidance, the government has implemented several innovative schemes to bring more transactions within the system, including raffling off luxury cars. Anyone issued an official IVA invoice is automatically eligible to win, but the provider is automatically flagged in the system if they have been avoiding tax. So the government has cleverly put the taxpayer to work for them to collect taxes.

Banking in Portugal is sophisticated and easy, and most transactions can be done online with no need to ever enter When finance becomes too much…remember, the good things in life are free a branch other than to open an account. Deposits are guaranteed up to €100,000 under European law.

Cash withdrawals from Portuguese bank accounts are free: Portugal was one of the world’s first countries to implement a shared banking platform to which all banks are linked and so ATMs, which are easy to find in most locations, allow free access to withdrawals, online payments, statements, and in some cases deposits. Payments or withdrawals using foreign cards and foreign accounts can also be done using the same machines, but subject to usual costs charged by the issuing bank. All major credit cards are accepted. Foreign exchange is easy and all banks and most of the world’s Forex companies operate in the country.

Anyone operating a business in Portugal after having run one in the US or the UK, for example, will find it more
difficult here. Although the Algarve has a Citizen’s Store (Loja do Cidadão) in Faro, which allows you to deal with all government departments, from finance to social security and even registering the name of the company, in a single day and location, annual returns which must be validated by a TOC (an ‘official’ accountant registered with a central professional body), the complexity of IVA returns, and the social security burden on the employer, make the country bureaucratic. The government is working on methods of simplifying this and automation has seen a huge improvement in service levels, but the underlying procedures and multi-stage approvals are still cumbersome.

When finance becomes too much…remember, the good things in life are free

Tax returns are reasonably easy to complete online, although there are limitations on the state’s computer system and online availability near the start or end of submission periods. It is recommended that you seek assistance from a professional tax adviser or accountant for your first tax return. Thereafter, with some support from the Ministry of Finance’s informative and multi-lingual online portal, you should be able to complete the annual return.

As with most countries, it is advisable that advice is sought from one of several specialist firms, several of which have long-standing experience in the region. The cost of a residency application under the Golden Visa program will cost in the region of €6,000 (with each renewal around €3,000), while dealing with an application under the Non Habitual Residency program will cost between €1,500-3,000, depending on the law firm involved.

Many people also prepare a will or testament to ensure that no confusion arises between countries as to their final wishes in case of dying in Portugal.

Accessibility: Levelling the Playing Field for Senior Tourists

Accessibility: Levelling the Playing Field for Senior Tourists

At the World Travel Market in London a panel discussion on accessible tourism included panellists from around the world, among them Paralympian Ade Adepitan. The participants expressed their frustration at the slow pace of change in levelling accessibility in the playing field for travellers with disabilities, starting with those with physical limitations or consigned to a wheelchair. What was striking, however, was the way in which this segment of the market was seen as still requiring exceptional treatment by operators of holiday or tourism businesses catering for the ‘general’ (read, non-disabled) public. In contrast, experienced operators of solutions in the senior space deal with guests with special requirements, whatever they may be, in a consistently personalised way.

A focus on the senior market equips a business to deal with the individuality that the demographic requires: clients with specific medical requirements, habits and preferences acquired over a lifetime, dietary special needs, a greater likelihood of allergies and skin ailments, medicines management needs, and accessibility needs, among others. Just as making available professionals, to ensure that seniors are not taking medicines which may be in conflict with one another, is a basic medical service for visitors or residents, so too providing appropriate infrastructure and facilities for disabled or wheelchair users forms part of a sensible solution to broaden inclusion.

Accessibility levelling the playing field for senior tourists Even parks have well-signposted disabled access

The interesting thing, as the owner of a completely adapted site in Brazil pointed out, is that accessible facilities have broadened the appeal of his site and much more revenue has been generated by the families and friends of disabled guests, than by any wheelchair user.

When Algarve Senior Living added a third location to its business model via a partnership with a beautiful river-side site near Portimão in the Algarve, the response and interest from the market was high. For a business focussed on the 50+ market, simple single-floor or accessible multi-floor accommodation is the logical choice. As the general market begins to understand the benefits of accessible accommodation to the general public, it will be interesting to observe whether owners and developers opt for a retrofit of existing (unsuitable, typically double-storey) accommodation or the development of fit-for purpose accommodation.

The site’s accessibility credentials include 60 rooms prepared for disabled or wheelchair access, with elevators and ramps (including to indoor and outdoor pools, terraces and all public areas), wide doors, fully prepared bathrooms and showers with rails and support bars, sensor activated sliding doors and lighting, and accessibility equipment rental. The immediate challenge was to create a network of services which covered the ground between the location and the guests’ point of arrival or departure, and extended beyond into the accessibility supply chain.

Accessibility levelling the playing field for senior tourists

While airlines already provide support in the form of wheelchairs and assistance to disabled users, often the support ends as soon as the traveller enters the airport terminal. In the Algarve, the support network is now much broader. A specialist accessible transportation company, Cultur’Friends, makes available adapted VW Caddie Active vehicles with manual ramps and hydraulic suspension. A network of accessibility partners, integrated into the European Network for Accessible Tourism (ENAT), points travellers with mobility or accessibility to partners or suppliers.
Service-based solutions such as those run by www.algarveseniorliving.com, are revolutionising the way in which travellers with accessibility needs find appropriate solutions. This includes increased focus on ensuring that accessibility information, including any limitations, is more readily available. Accessibility statements, better designed web sites, and in-situ signage, all help to make the experience of guests with disabilities as similar as possible to visitors who are not disabled.

Luis da Silva, Founder and Managing Director of Algarve Senior Living, comments that “we have always had an inclusive vision. While we have been realistic about the current infrastructural constraints, we are constantly striving to seek broad-based solutions. It just makes sense because the quality goes up for all concerned.”

To paraphrase Paralympian Ade Adepitan: “There is an £8.5 billion market out there. Catering for the accessibility segment of the market is not simply a question of ensuring all travellers are treated fairly, but it makes sound business sense. Foolish is the business which ignores the potential of this vast market, avid for travel and for new experiences!”