Chapter 9

Portuguese Property: Suggestions And Calculations

Second Passport

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.

Costs . . .

I’ll now try to tot up the likely costs of seeking a second passport through the ownership of immovable property in Portugal, taking as an example a two- bedroom property within ten minutes walk from the beach, ten minutes drive from an eighteen-hole golf course, 25 minutes drive from Faro airport and about ten minutes drive from the town of Albufeira.

Such a property can be bought for a basic price of $US95,000.

In addition there are land registry and legal fees associated with the purchase, calculated at 3.1% of the price — in this case $US2,945.

If you are buying a finished property, there is a government tax to pay too, of 10% of the purchase price. But this is not payable if you are buying a property in the course of development, and I will assume that matters are so arranged that this exemption applies in your case.

As for furniture, although tastes — and resultant expenditures — vary, I will assume that you spend on furniture an amount equal to 10% of the price of the property — in this case therefore $US9,500, bringing direct capital costs of the property purchase to $U5107,445.

Then, turning to costs not directly associated with the property investment, you should allow for about $US450 per person in legal fees in connection with the residency application — say three persons: $US1,350.

Your trip to Lisbon on your residency application, if from Hong Kong, and again for three persons, and including hotel, say $US7,500.

Two further trips to Lisbon to renew your residency visa (for head of family only) say — $US3,000.

More legal fees (allowing for powers of attorney at about $US180 each time, say 6): $US1,080.

If you live in Hong Kong, you need not allow for the cost of Portuguese lessons, as the Portuguese Consulate kindly provides them gratis. But anywhere else, where the consulate is unlikely to be so close to your home, you should perhaps allow a few hundred dollars, say $US400.

These items total $US120,775.

Now, if you are buying a villa in course of development you will not be laying out the whole of the purchase price on day one, and there are in the above list other items that are obviously not payable for a year or two. But for the purpose of calculating the return on your expenditure in a conservative manner I will treat it all as committed from the beginning.

. . . and returns

I shall assume that you are able to finance the above expenditure by borrowing all the money required. Roughly half of the purchase price of the property can be borrowed on the security of the property itself, and I assume that you have other assets that will serve as collateral for the balance of the outlay. I further assume that you borrow in US or Hong Kong dollars, for a term of seven years, at the end of which the principal is repayable, with interest payable in the meantime at say 10% a year.

Your initial yearly interest burden is thus $US12,078. Another assumption I make is that in the first year of ownership, because your property is still being finished, you get no rent. So you should capitalise the first year’s interest, and in your books show the total capital cost as $US132,853, and the continuing interest burden at an annual $US13,285.

In the second year however you should start to get rental income. Not long ago one had to allow over a year as the time required for building, but things have speeded up.

I am assuming that during the 77 days of the peak season (July, August, and the first half of September) you will achieve an occupancy rate of 95% at a weekly rent of $US920 — making a total of $US9,600 in this period.

Then, in the next busiest season (second half of May, whole of June, and second half of September — which covers 62 days) I assume a lower occupancy rate of 75% and a lower weekly rent of $US570, giving $US3,800.

In the third busiest season (April, plus the first half of May, plus October —76 days) I adopt a lower still occupancy rate of 45% and a lower still weekly rent, of $US410, producing say $US2,000.

And in the quietest season of all, when the occupancy rate may drop to 15% (the 150 days of November through March) I take a weekly rent of $US320, producing $US1,000 for the whole period.

Please note that these assumptions involve a total of 190 days in the year when there is no paying tenant in the premises. If you are sufficiently flexible as regards your own holiday plans, there is no reason why you should not take opportunities to enjoy your asset, and at the same time gain bonus points for having actually resided in your residence, should the question come up in connection with your residence/citizenship objectives.

The total rental income thus assumed for the first year of lettings is $US16,400. That is a gross figure.

You should expect to have to pay the following outgoings:

Marketing and letting agents’ commission 20% $US3,280

Charges for gardening, maid service arid water 2,500

Annual service charge 1,050

Rates and insurance 270


So your gross rental income of $US16,400 produces a net figure of $US9,300.

This assumed net rental income in the second year of ownership is about 7% of your total book cost, or 8.5% of your direct capital costs of the property purchase.

If rents and occupancy rates remain the same in the following years you will in each of years 2 to 7 be laying out (whether actually or notionally) $US13,285 in interest and getting in only $US9,300 in rent — a net annual deficit, before tax (as to which see below) of about $US4,000. But if property prices, and rent levels, rise over the period, the rise does not have to be too dramatic to reduce the deficit or even transform it into a surplus.

If, for example, rent levels increased steadily by 5% each year, by the end of the seventh year the net rent (before tax) should be $US11 ,869, reducing that year’s deficit to about $US1,500. If the annual rate of increase were 10%, the annual deficit would be eliminated by year 6 (by net rental receipts of $US13,616) and by year 7 would have been turned into a material surplus (by net rental receipts of $US 14,977). These figures are before taxes.

Meanwhile on the capital side, the property for which you had paid $US95,000 (not including the furniture and legal costs) would, by the end of year 7, given a 5% annual rate of appreciation, have become worth $US121,000, or, given a 10% rate, $US153,000.

Taking the intermediate (7.5%) rate of appreciation, you would in year 7 just about break even on income (after deficits in years 2 to 6 accumulating to about $US12,000 — this is before taxes) and have a property you could sell for $US136,000. Bearing in mind that during those years you will also have had the opportunity to use the property yourself for at least several weeks (if you are flexible enough about your holiday arrangements), at the end of the day the net cost of the operation (pre-tax anyway), on these figures, is insignificant to anyone in a position to raise the necessary capital.

It is vitally important to note that there is a real estate tax, as mentioned briefly in Chapter 6. The relevant aspect of this tax is that buildings, such as your apartment or villa, are taxed at up to 19.8% (urban property) or 15.4% (rural property) of the annual rental value. This, if the building is let, is the actual amount of the annual rent. If the building is not let, the value is a notional one, usually out of date, shown in the municipal property register.

Until recently, interest appears to have been a deductible item in computing the amount of tax payable, but the position now is that the deductibility of interest is limited to the interest on one million Escudos, which is only about one-tenth of the capital investment you may be contemplating.

Property agents familiar with the Algarve tell me that the rates of appreciation that I have assumed here are considerably lower than what has actually been experienced in the last four years.

Chapter 10