May 2011 Archive

Wednesday 25th May 2011

Portugal Property Market Analysis

Residential Property Market in Portugal, Silver Coast Area

Nigel Salmon MD of Girasol Homes (www.girasolhomes.co.uk) recently spoke to his colleague Craig Anderson in the Silver Coast Region of Portugal regarding the marketplace and current conditions locally.

Nigel: “What is the market like locally?”

Craig: “At the moment there is a lot of press with regards to the current climate in Portugal which is fuelling some concerns about the financial and political stability of the country. With the current Centre-Left government resigning and the press bandying around phrases like “Financial Bailout”, “Austerity Measures” and “Recession” like they were confetti, it is no wonder. On the back of this there have been some reductions in the asking prices of some properties, and coupled with some reports that property prices are in “Free Fall”, seems to be giving the impression that there is also a real instability in the residential property market”

Nigel: “But is this really the case?”

Craig: “Every market is unique and has unique opportunities, let me explain”

There are several factors that make this market different from markets which may be more familiar to people such as the UK or Spanish Residential Property Markets.

1. Land classifications have been created with there being 4 main types. They are Urban, Touristic, Rustic (or Agro-Florestal) and Eco-Reserve Land. This allows for the control of where, as well as what type of properties can be built. For example you can’t build an apartment block on Rustic land. Rustic land generally only allows 1 detached or 2 semi-detached properties to be built.

2. There are very strict guidelines when it comes to building in Portugal. These include very rigid rules regarding the size of building in relation to the land that it is being built on as well as the maximum height and so on. This is designed to prevent overbuilding, or the construction of high-rise apartment buildings etc.

3. Proximity to the Ocean. There are restrictions on the various land types as to how close to the Ocean you are allowed to build. Recent changes have meant that it is no longer possible to build on certain types of land, such as Rustic land, if they are within 800m of the coastline.

4. There is a minimum land requirement meaning you must have a certain amount of land in order to be allowed to build on it. Again recent law changes saw the minimum requirement for Rustic land changed from 2,000sqm to 40,000sqm which greatly reduced the availability of building land over night.

5. Mortgages, for some time now it has been virtually impossible to borrow money from a bank to buy a piece of land. Therefore virtually all the land is debt free in Portugal and the owners, generally, are under no pressure to sell the land to clear debt.

Nigel: “So what does all this mean?”

Craig: “If you take all the factors and apply them across the board, it means that the supply of land is very limited. It means that any available land with a good sea view is at a premium and will only sell at a premium price. As you move inland the price does drop a little but the scarcity of Rustic land means that land prices are still fairly high. It also means that landowners are not desperate to sell their land and therefore you are unlikely to see wholesale reductions in the price of land. It means that existing properties, particularly those with a good sea view or some other unique feature, will hold their value because it is generally no longer possible to build a comparable property given the new and current building restrictions.”

Nigel: “So why therefore are we seeing some reductions in asking price?”

Craig: “There are reductions in the asking price of some properties, and whilst most property owners seem to be more receptive to negotiating than before, it tends to be the developers who are making large scale cuts in the asking prices. This is occurring for 2 possible reasons.

1. The builder may have borrowed during the ‘good times’ at low interest rates to make speculative builds and they may have designed their properties to cater specifically to international property buying market. Now that ‘harder times’ are here, they are being squeezed by higher costs, and interest rates at the same time when the international property buying market has slumped because of exchange rates and worldwide economic woes. Some builders are left with little choice but to slash the price of their property in order to liquidate the asset, clear the debt and basically get out. We have already seen a number of builders shut up shop under current economic pressure. We do have access to advertised and “un advertised” discounted homes.

2. Not all builders however are in the same dire straits. Many are in much stronger positions but possibly need to make just a single sale to ensure they are able to weather the current economic storm. However because other builders are cutting their prices, the stronger builders are being forced to follow suit in order to remain competitive in the eyes of the few bargain hunters who are out there. It is also worth noting that most of the price reductions are coming from the luxury market and tend to be on properties that are priced in excess of €500,000. At present we are seeing only a few obvious price reductions on properties below this figure.”

Nigel: “So what impact is this having on the market?”

Craig: “Things have changed and the change has been very rapid. The new property market is split between properties priced over €500,000 and those priced below this figure. The higher priced properties are seeing a reduction in the asking price which has yet to filter down to the properties below €500,000. The resale market tends to see prices remaining fairly steady although vendors seem to be more receptive to negotiations. The plot and build market is the one seeing the least amount of activity at the moment because of the increase in VAT and the general rising cost of materials. 12 months ago you could have bought some land and built a property for as much as 25% below what you would have paid for a comparable, existing property. Unfortunately this is no longer the case as the price differential has slowly been eroded away. At the moment, particularly with the current reductions on Luxury Properties, it is now more sensible to buy an existing property and enjoy it now, rather than build your own property for much the same price but have to wait up to 2 years for the result.”

Nigel: “So when do you believe it is the best time to buy a property and why?”

Craig: “I believe now, Summer 2011, is the time to buy because the current prices will not remain as they are and there are some exceptionally good bargains around. The next election here in Portugal is set for the 5th June. In the short term, it really doesn’t matter which political party gets elected to office because they are all bound by the terms of the “Bailout” to implement the same measures. Then the agreed financial rescue package needs to be delivered and be in place by the 15th June. Once these two events take place, the dust will begin to settle.

The world will see that there isn’t such a major problem in Portugal and the confidence will begin to return and people will start investing in property again. Once this starts to happen, the price reductions will quickly disappear as the laws of economics kick in. We will see the demand for properties increase as the confidence returns and the limited supply of properties will reduce as properties are sold to satisfy the demand. Increasing demand and a reduction in supply will inevitably result in the prices going up. Initially I don’t expect there to be a huge increase in prices, those that have been reduced will revert to their pre-reduction prices and the rest will probably remain as they are, there will just be less room to negotiate. However, as time goes on and confidence continues to grow, we will see a shortage of available properties with the result that it will become a sellers’ market, and then we will see prices increasing.”

Nigel: “But won’t they just build more properties to satisfy the demand?”

Craig: “Possibly. However for at least the last 18 months the banks in Portugal have not been lending money to builders to make speculative builds and there is no indication yet that this situation will change in the near future. If the situation does change it will take at least 18 months for newly built properties to be ready, and due to the reduced number of available builders, the number of new properties coming onto the market is unlikely to be large enough to have a significant effect on property prices as a whole. It is more likely that these new properties will be priced in keeping with whatever the current value of the market is at that time.”

Nigel: “Could I not just wait and buy a repossessed property from a builder that has gone out of business?”

Craig: “Yes you could. However, repossessions do not operate the same way here as they do in other markets such as the UK. Some things in Portugal move rather slowly and can be rather complicated. Therefore, depending on the circumstances, a property that is repossessed today could take as much as 2 years or more before it is put back on the market by the repossessing body. During that time the building will have been unoccupied and, depending on what stage the construction was at when it was repossessed, it may well have had the interior exposed to the elements. Therefore there may be additional hidden costs involved in getting the property back up to scratch and the price at which it is offered to the market may not be any lower than the current market value. So it is therefore better to buy it now, at a reduced price if possible, rather than wait for an undetermined period of time to buy the property, with little reduction in price, that has now deteriorated and needs additional work.

Therefore, whilst the Residential Property Market is being affected by current circumstances, it is not an unstable market. I believe as soon as the current situations are resolved, the market will very quickly revert to its natural point of equilibrium. I also believe we are unlikely to see the widespread peaks and troughs in Residential Property prices, which have been witnessed in the past in other markets such as the UK or Spain, as a result of bursting property bubbles.”

We have access to a larger than normal amount of quality properties in all price ranges and many great locations, if people are buying for all the right reasons and in the right areas they will find a great house with us in Portugal.

Craig Anderson is in charge of the Silver Coast Operations for Girasol Homes Limited.

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