A Retrospective and Future look at the Real Estate market in Portugal in 2022 and 2023

The increase in construction costs linked to rising inflation, reaching a height not seen for more than 30 years, and a rise in interest rates putting an end to the period of “cheap” money, the national real estate market will have no choice but to reinvent and revolutionise itself.

This inflation and the respective rise in interest rates, which has not yet come to an end, mean that national property developers will have to target a new foreign public with greater buying and liquidity capacity, but also with greater rigour and demand when it comes to standard and what we call luxury in order to ensure their own financial viability.
For this reason, even if nobody wants to hear it, the crisis is beginning to set in in the national real estate market, just perhaps not in the format expected.
The increase in construction costs was already predicted before the pandemic, and it shows no signs of abating. This, added to escalating inflation that in itself reduces the disposable income of families, makes credit for everyone more expensive.
In short, the current situation the national real estate market finds itself in is not highly encouraging. The rising costs leave little room for either mistakes or innovation, and the demand for cheaper real estate, in line with the funds available to the population, will increase beyond supply.

This has only been reinforced by the European Commission´s (ECB) announcements, which had already forecast an inflation rate for Portugal of up to 5.8% in 2023, and a gradual decrease in 2024. The ECB has also already confirmed that it will maintain the trajectory of interest rate rises to converge with inflation, so we just need to carry out the right calculations to know where we are going with interest rates by the end of 2023.

We could say that the real estate sector is going to go into contraction, and there´s going to be a crisis and a real estate bubble in 2023. This, however, looks unlikely for a number of reasons.

There is a strong international market with great liquidity and an appetite to invest and buy in Portugal. This market is increasingly present in Portugal, and is presenting itself as a consistent alternative for both national and international property developers operating within our real estate market.

Today the majority of new developments are made and designed specifically for the international public. For these reasons, the lack of interest from developers and also the wrong tax policy promoted in recent years in Portugal, the new housing supply is no longer aimed at the national middle class and there are signs that this shortage will become worse in the near future.
However, there are problems that contribute to this situation that can be alleviated to bring a new wave of investment within the national market. The brutal tax burden on renting and property investment and the extreme delay in licensing needs to be managed. These factors can only be resolved with an intense and clear change in the public service that moves to values a private initiative for the creation of housing for third parties and projects that benefit the urbanism plan. There is also a need for supply in the urban conglomerates where there are more employment opportunities for the young on offer.
The present context of our real estate market, added to general inflation and the increase in construction costs, associated with the heavy tax burden on development and the lengthy licensing processes, have a brutal impact on the final price of housing for the consumer, and limit developers in their ability to offer certified property at an affordable price to the population.

Recent statistics show this to be true. According to the National Statistics Institute (INE), in September, the new housing construction cost index accumulated the seventh consecutive month of double digit increases, by registering a 13.4% rise in relation to the same month last year, taking the average variation over the last 12 months of this index to 10.8%. In the same month, the average interest rate associated with new home loan contracts reached a seven-year high, by increasing to 2.23%. The same happens with inflation, with the consumer price index registering, in October, a variation of 10.1% in relation to last year, the largest increase since 1992.

The national market is still dominated by the Portuguese, who still take the biggest slice in the sales of new properties. This is because the Portuguese know the country better than foreigners, so continue to be the main buyers in urban and peripheral projects and represent more than 80% of property transactions in Portugal.

What is my opinion for 2023 regarding the real estate sector in Portugal?

You would have to resort to a crystal ball to know for certain how the current political and governmental situation in Portugal and the respective fiscal policy will influence the real estate market. With the present government drifting, I would not be at all surprised if new populist fiscal measures, directed at capital and private investment, were implemented, which may influence the flow of capital and investment in Portugal.

Aside from the political influence, I would say that Portugal and the real estate industry in Portugal are at the beginning of a positive revolution.

It will be a year of greater caution and strategic thinking, highly influenced by the evolution of inflation and interest rates.
There will be greater diversification in international investment in Portugal directed towards investment in alternative segments such as residential, senior living, healthcare and student housing, attracted by the lack of supply that exists in the national market, segments that evolve in favour of demographic trends, also benefiting from generational profile changes market fundamentals that remain valid for a long period.
This will bring about that change in culture in Portugal from owning permanent housing to a new model, that of long term rental, as exists in most European countries. In these countries, the percentage of property ownership does not exceed 35 to 40% of the population. Long term renting is an important factor, because it reverts positively to the economy of those countries as workers are more flexible in their option to follow the job that benefits them the most instead of staying in the same place for a lifetime paying for a house and not being able to follow the best job offer because they have a house to pay for.
With this, the Portuguese State and its government will be obliged to create new fiscal norms to support the initiative of creating properties for residential renting and will have to install legal facilities and benefits and contractual security for private individuals who want to invest in this area by creating housing space for all, in particular for our young people who, in the current conjuncture, have to live at home with their parents until the age of 36, which should be a national shame at all levels.

I close here with the last theme of the environmental, social, and corporate governance (ESG) and decarbonisation in buildings, which will be an important issue in 2023. The building stock in Portugal urgently requires a national renovation programme that is in line with the environmental targets outlined already for 2030. These assets will stand out for the quality they offer and for responding effectively to the greater ESG and Sustainability concerns of companies and also of investors and buyers with an environmental awareness increasingly concerned about the future of the planet. 

It is important to highlight that Portugal may be ahead in many environmental issues but in this particular issue it is in the tail of Europe, so is something we have to address urgently.

Written by Paulo Lopes