News that pop star Madonna went house-hunting in Portugal in June this year seems to have inspired other foreign buyers to go house-hunting in the country again. Great variety of properties on the market, great-value-for-money, good rental yields for holiday lettings and capital gains in areas where prices are going up mean that Portugal is once again a popular destination for foreign investors and people looking for a Portuguese holiday home.
The recovery of Portugal's residential real estate market began in 2014. Portuguese house prices continue to rise, as the country's economy continues to recover from the worst recession in living memory. According to data published by Statistics Portugal (INE), the country saw house prices rise by 3.84% (or 2.97% in real terms) in October 2016, compared to 2015. At the close of the year the average square metre cost 1,081 euros or US $1,130.
Seen by property type, prices for Portuguese villas increased by 4.77% or 3.89% in real terms, and Portugal's apartment prices increased by 3.31% or 2.44% in real terms in October 2016, seen in a year-on-year comparison with 2015.
Lisbon has become the European destination of choice for tech entrepreneurs and digital nomads. Property prices in Lisbon grew by 2.59% or 1.72% in real terms year-on-year in October 2016, now costing on average 1,308 euros or US $1,367 per square metre. Indeed, house prices improved in all of Portugal's 24 urban areas, with Santa Maria da Feira seeing the highest growth rate of all with 12.2% during that period.
Demand has also increased steadily. Total transactions recorded increased by 15.8% to 31,535 year-on-year in October 2016, according to INE data.
Speaking to the Global Property Guide, Chris White of real estate agency Ideal Homes Portugal, enthused that "sales have increased hugely this year and we've seen a significant shift in buyer profile as increasing numbers of investors realize the potential of the Portuguese real estate sector."
Good Value for Money
As far as foreign buyers are concerned, Portuguese property is excellent value for money, even when buying in the Algarve or in Lisbon city centre. While a 120 square metre apartment in the beautiful Algarve may come with an average price per metre of 1,786 euros (October 2016), and a 120 square metre Lisbon apartment costs 2,543 euros per square metre on average (same period), in Madeira the square metre costs just 1,205 euros on average for a similar-sized apartment.
Given how much such a Mediterranean property would cost on the Italian coastline or at the Costa del Sol in Spain, Portugal is remarkably good value for money.
Good Rental Yields for Lisbon's Apartments
While gross rental yields from Algarve-based apartments are quite moderate, ranging from 3.5% to 3.8% (Global Property Guide data from September 2016), Lisbon's apartments saw gross rental yields ranging from 5.4% to 6.2% last autumn. The country's economy has continued to improve since then, and rental yields have followed suit.
Perhaps surprisingly, smaller apartments remain the most profitable in the rental sector. An average one bedroom, one bathroom apartment with just 50 square metres of floor space in Lisbon sees rental yields of ca. 6.32%. By contrast, according to Global Property Guide research, a 250 square metre apartment returns merely 4.5% in rental yields.
Lisbon villas are also a good investment for buy-to-let landlords. Here rental yields ranging from 5.45% to 6.05% were recorded in September 2016, and have steadily gone up as entrepreneurs and digital nomads are relocating to the Portuguese city. Again, larger villas have smaller rental yields.
In Lisbon, the average apartment can be rented from ca. 12 euros to 14 euros per square metre per month, which means the average 120-square metre apartment can be rented for ca. 1,434 euros per month, while the average villa with 450 square metres rents for ca. 4,185 euros per month or between 9.00 to 11.00 euros per square metre.
At the Algarve, meanwhile, rents range from 4.00 euros to 6.00 euros per square metre per month, which means a rental income of ca. 620 euros from a 120-square metre apartment. As Algarve villa prices are also just 6.00 euros per square metres per month, an average sized 300 square metre villa will bring in ca. 2,356 euros per month.
It is possible to buy a 2-bed apartment in Lisbon for around 355,000 euros, although luxury apartments with three or four bedrooms are likely to cost around 1,225,000 euros in central Lisbon.
By contrast, a 4-bed villa in Obidos can be had for just 695,000 euros, and a 3-bedroom villa in golfers' paradise Vilamoura in the Algarve can be as little as 495,000 euros.
Potential Increase of Property Tax
It should be noted that recently Portugal's President Antonio Costa proposed that indirect taxes and levies on real estate should be raised this year to help pay for better pensions and civil servants' salaries. As part of these new tax measures, he suggested a raise in property taxes for real estate costing more than 600,000 euros. The proposed tax increases are controversial and it is by no means certain that they will be approved by the Government, as they are apt to put off foreign investors.