Chapter 9 Portuguese Property: Suggestions And Calculations
A real estate investment, like any other kind of investment can offer
two kinds of return (sometimes a combination of the two):
1. Capital appreciation. While general economic conditions
may cause all property to appreciate (or decline) in value, good quality
property that will have continuing demand regardless of changes in economic
conditions offers greater potential appreciation than just any property,
and at the same time should represent a lower downside risk in the event
of a general decline in values.
2. Rental Income. Any rise in rental income will be accompanied
by capital appreciation (and often vice versa) as the level of rental
returns has a similar cause: a well-located property that can always be
rented out.
In Portugal there are two kinds of property that offer superior potential
for appreciation and rental income.
Luxury apartments/houses in Lisbon
In January 1986, Portugal became a member of the European Economic community.
One effect is an influx of bureaucrats into Lisbon seeking superior (government
paid) accommodation. In addition, Portugal’s economy should receive
a significant boost from Community membership, which will further improve
demand for such property. An inevitable increase in Lisbon’s international
population could render the performance of the city’s property prices
similar to those of central Paris, where the rate per square meter was
about 3,000 francs in 1972 and is over 20,000 francs now — capital
growth at a compounded annual rate over 13%, in addition to income earned
over the fifteen years.
Anyone wishing to consider buying a city apartment would be well-advised
to take considerable time over the choice, and make sure (so far as possible)
that the moment is right, in relation to the cycles that occur in all
these markets.
Vacation/retirement villas/apartments
The coastal region known as the Algarve is a highly popular vacation destination
for travellers from Britain, Germany, the Netherlands and the Scandinavian
countries. In addition to hotel accommodation, there is a significant
demand for — and supply of — holiday homes and apartments.
Most northern Europeans seem to prefer to rent a villa for their three
to four week vacation rather than stay in a hotel.
Also, like the south of Spain, southern Portugal is home to thousands
of expatriates from Britain and elsewhere in northern Europe who prefer
sunshine and a low cost of living for their retirement years (see Cost
of living, in Chapter 6).
However, for prime rental returns you should aim at a property that is
well- located for the vacation market. Such a property will command a
weekly rent, in peak season, of several hundred dollars. While it will
not be rented every month of the year, the returns from renting for holiday
purposes should be higher than from a year-round renting to a retired
person or couple.
For this market, location is of paramount importance. In order to select
a property that will get the best rentals you need to understand the different
holiday seasons that have a bearing on lettings.
The peak season is the traditional summer holiday time, which runs from
the beginning of July to the middle of September.
July and August are the top months.
But if you own a prime property you can expect it to be let from 1 July
to 15 September.
There are two other good periods for letting in southern Portugal if the
property is well-located: April and the first half of May, and the second
half of September plus the whole of October. This demand will come from
golfers.
If you own a prime vacation rental property that is near both a beach
and a golf course, you should find tenants from April through to October,
although not at the same rent throughout: the rate for July and August
is likely to be about double the average rate for the other five months.
Should your property satisfy only one of these conditions, obviously it
will not stand as good a chance of being rented out so long.
It is also possible to rent out really first-class property during the
months of November, December, January, February and March, but at rents
which may be as little as one-third of the peak season rents. The comparative
mildness of Portugal’s winters, coupled with the existence of year-round
services in certain localities, result in some small demand even in what
in the past has been a dead season in most resort areas. But before you
consider relying on any significant income from property in any particular
neighborhood in the winter, I would advise you to visit the locality during
the months in question, perhaps in the role of tenant. There is nothing
worse than seeing a place throbbing with life in the high summer and then
returning in January to find most of the handy shops, cafes and other
services closed up until Easter.
As indicated above, the weekly or monthly rent for different times of
the year varies with demand. You will need professional management to
ensure your property is efficiently marketed to vacationers.
In Summary a prime vacation property is one that is:
near a beach;
near a golf course; and
managed by professionals with access to the northern European market.
A property with these characteristics will maximise returns by extending
your letting season to its maximum, and by commanding a higher rent than
properties in less favorable locations.
Possible returns Prices for Portuguese property where the demand is primarily from foreigners
— as is the case in the Algarve — are usually quoted (and
paid) in pounds sterling.
Since 1979, well-located property in the Algarve has appreciated at
an average annual rate of 15%, measured in sterling. In terms of the
declining US dollar, the rate of increase has of course been far greater
in the last couple of years. It would be conservative to estimate that
in both sterling and dollar terms future appreciation should occur at
say 10% annually, on average.
Regardless of the accuracy of any attempt at a precise estimate, it
is reasonable to expect some capital appreciation, for two reasons:
First, increasing affluence in northern Europe (the main source of
customers for vacation accommodation in southern Portugal) will bring
a steady rise in demand for this type of rental accommodation. Even
though Europe’s standard of living is rising at a mere one per
cent annually, demand for travel products tends to rise faster than
the average increase in wealth.
Secondly, compared with the south of Spain. and the south of France,
southern Portugal is still relatively underdeveloped as a tourist or
retirement area. This does not, by the way, mean that it’s in
any way primitive. Tourism is the Algarve’s major industry. The
province’s major city, Faro, is well-served by scheduled and charter
flights direct from all major European cities.
What it does mean is that, because the cost of living in (and touristing
to) Portugal is lower than just about anywhere else in Europe (and certainly
cheaper than anywhere else within the EEC — except, perhaps, Greece)
it’s very attractive to European vacationers.
As overall travel demand rises, the relative underdevelopment of the
Algarve should result in above-average appreciation in Portuguese vacation
property prices.
The second element to be considered is of course the rental return.
In Europe generally, investments in city property will usually bring
an annual yield of between 4% and 6% of the capital value — and
even lower than that during the periodic booms that occur in property-buying.
From a well-located vacation property, one can expect a higher yield —
between 7% and 10%. This is because it is harder to rent out your vacation
property for a few weeks at a time than it is to collect the rent from
a tenant with a two or three year lease. There is also more risk involved
in a vacation property. Aside from the probable higher expenses —
in terms of wear and tear to the furniture and fittings, and higher management
fees (for proper management) — there’s the risk of longer
periods of vacancy. This is why only a premium vacation property, that
can command rental revenue even in the low season, will command this higher
7%-10% return. /continued...
Reminder: This edition of How To Get A Second Passport was published
in 1990. Check the useful
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