Real estate and construction

The construction and real estate sectors have historically made a high contribution to Portugal's GDP. The general perception is that the country is an attractive destination for investment in these sectors. Until recently, its main cities offered average prices per square meter significantly lower than the average prices per square meter of the main European and world cities, and its tourist areas, especially in coastal areas, also had very competitive prices and quality. Let us not forget that Portugal has been gaining increasing notoriety as a tourist destination and the second home market in the country has been highly sought after by foreigners. The short-term rental market for tourism (Alojamento Local) has also seen notable growth in recent years. These factors, associated with the quality of life, cosmopolitanism, climate, its relative proximity to central Europe, the social peace that exists in the country, its gastronomy, its history, as well as many other factors, have constituted an important attraction factor for investors in the real estate and construction markets in Portugal. This external demand is associated with an important internal demand since, traditionally, and due to policies encouraging the acquisition of their own home, the Portuguese usually favour the purchase of their permanent home over renting a house. Even though, in global terms, the development figures for the construction and real estate market are quite positive, we cannot fail to point out that the country is quite asymmetrical. The coastal areas, close to the two large cities – Lisboa and Porto – and the main centres of tourist development, in the Algarve, on the Alentejo Coast and on the coast north of Lisbon, have seen enormous development and growth, in contrast to a rural interior, each increasingly deserted and which, with a few exceptions, does not seem to keep up with this growth and investment attraction pace. The interest rates increase (with a clear impact on property acquisition costs) and the increase in rents (the result of years of distrust among tenants and owners regarding the stability of the rental market and the legal regime that supports it and, in recent times, due to the inflation rate increase (the main reference for updating rents)) have in recent times constituted an increasing difficulty in accessing housing for lower-income classes and, also, for increasingly larger segments of the middle class. In order to counterbalance this environment, the Government has been adopting a set of measures that favour the housing market, which are not always consensual and which have involved, for example, limiting rent increases, limiting the installation of new units of Alojamento Local, especially in locations with greater scarcity of rental offer, in the deferral of payment of part of the interest on loans for the purchase of permanent housing. Without prejudice to the foregoing, we believe it would be useful to present the general outline of the regimes for purchasing property and renting residential property in Portugal, considering the interest in both types of transactions shown by clients in recent times.  

Property purchase in Portugal

Buying property in Portugal can be achieved under two essential forms: - asset purchase - purchase of the SPV owning the asset The purchase of a real estate asset begins with its identification. In Portugal there are many real estate agents, who must be licensed with IMPIC (the construction and real estate market supervision authority), making it possible to consult the database of licensed agents. As a rule, especially in the case of purchasing real estate for housing, the mediator's commission is paid by the seller. Depending on the type and purpose of the transaction, especially in transactions of a more complex nature, after identifying the property, a memorandum of understanding or letter of intent may be signed, which allows the parties to move forward with the negotiation at the same time as the buyer evaluates specific details of the property, namely those regarding its licensing, urban planning issues, registration and other legal aspects, maintenance, etc. In this type of documents, it is common to insert clauses that prevent the seller from negotiating with other potential interested parties while the memorandum or letter of intent is in force. In the case of transactions that involve the purchase of a SPV it must also be subject to due diligence. If the buyer's interest in the property remains after the due diligence carried out (or even in cases where no type of due diligence has been carried out), it is common to sign a purchase and sale promissory agreement. This type of agreement, essential for example in the transaction of properties still under construction, establishes a set of obligations for both contracting parties and may also provide for the conditions to which the definitive transaction is subject. Once again, the complexity of the promissory agreement depends largely on the specific aspects of the transaction in question, but it is possible to immediately point out a set of aspects that are necessarily foreseen in this type of instrument. For example:

• Fulfilment of payment obligations by the buyer – with the conclusion of the agreement, it is customary to pay a deposit (which the buyer may lose in the event of breach of contract attributable to him), as well as schedules for reinforcing this deposit, especially in the case of properties under construction, in which these reinforcements shall be paid as construction progresses and as long as certain conditions are met by the seller.
• The fulfilment of certain obligations by the seller, such as guaranteeing the exercise of the right of preference to whoever benefits from it, obtaining certain registrations, licenses, authorizations that are necessary for the transaction, carrying out certain renovation or conditioning work on the property, etc.
• Among the most common conditions precedent for the transaction to be completed are: that no holder of the right of preference exercises it, the buyer obtaining bank financing, the completion of construction work within the stipulated deadlines.

The promissory agreement also establishes the deadline for executing the definitive agreement. As already stated, many property transactions, especially those carried out by national citizens, benefit from bank financing. Normally, this financing takes place through a mortgage guaranteed loan, in which the property constitutes a guarantee for the fulfilment of the obligations arising from the loan agreement for the borrower. Transactions involving mortgage guaranteed loans are, without much doubt, the most common in Portugal, especially in the situation of acquiring permanent housing. The amount of the loan to be granted is, obviously, subject to the appraisal of the property. Although the sales value is typically agreed between the parties, ultimately defined by the seller, in transactions resourcing to bank financing the value of the appraisal carried out by the bank is essential to determine the granting of the loan and its amount. The completion of a real estate transaction requires that buyers, even foreigners, have a tax identification number (NIF) assigned by the Tax Authority. This NIF is essential for paying taxes and fulfilling other tax obligations, for example of a declaratory nature, relating to the property. As we have already had the opportunity to point out, there is a set of documentation relating to the property that must be analysed and confirmed by the purchaser. Among these documents we highlight the following: Caderneta Predial – Document issued by the Tax and Customs Authority containing data relating to the tax status of the property, namely its description, its value for tax purposes, etc. Land Registry Certificate - Document issued by the Land Registry Office that contains information about the location and composition of the property, the identification of the respective owners, as well as the existence of burdens and charges that affect the property. Use Permit – document issued by the Town Hall that indicates the permitted use for a given building or unit: housing, or non-housing purposes (commerce, services or industry). This document is issued at the conclusion of the construction process, and therefore also certifies that a given property meets all legal requirements (safety against fire risks, healthiness, habitability, for example). Energy certificate - Document issued by the National Energy Agency, which records the energy efficiency of the property. Property technical sheet – Document that indicates the main technical and functional characteristics of the property. Declaration of no debt to the condominium – this document guarantees that there are no debts to the condominium, when the property is a unit in this type of real estate development. In this regard, it is worth noting that, when purchasing a unit, the condominium regulations must be analysed and, if the property is part of a tourist development, the rules that regulate that specific development must be analysed as well. The definitive property purchase agreement may be concluded through a deed executed before a notary or through an authenticated private document formalized before, among others, a lawyer. Typically, the documentation required to formalize the transaction documents is as follows:

• Identification and tax identification documents of the parties involved;
• Land registry certificate;
• Caderneta Predial issued by the Tax and Customs Authority;
• Use permit (in the case of properties built after August 1951);
• Property Technical Data Sheet (if the use license was issued after 03/30/2004);
• Energy Certificate;
• Proof of IMT (tax on immoveable property transactions for valuable consideration) payment;
• Documents waiving the pre-emption right (when applicable);
• Statement of no debts to the condominium (when applicable).

Among these documents is the proof of IMT payment. The IMT is the tax usually levied on property transactions and is calculated over the value of the transaction or, alternatively, the value of the property for tax purposes, whichever is higher. The IMT calculation varies according to the value of the property, its location, and its purpose. The tax must be paid before the transaction and proof of payment is part of the completion documents, as already mentioned. In addition to IMT, there are other taxes relating to the ownership and transaction of real estate. First of all, IMI – this tax is an annual tax, calculated on the taxable value of properties. The definition of IMI rates is annual and made by the municipality where the property is located, which stipulates a rate within a range defined by the IMI Code. Currently, this range is between 0.3% and 0.5% for urban properties already appraised under the terms of the IMI Code, and between 0.5% and 0.8% for the remaining urban buildings. Capital gains generated by the sale of properties will also be taxed under income tax (IRS or IRC, depending on whether the taxpayer is a natural or legal person). The transaction will also give rise to the payment of Stamp Duty – a tax that falls on acts and contracts – particularly if it is concluded by public deed and the transaction involves bank financing. These are, in necessarily very broad terms, some of the essential aspects relating to the sale and purchase (and ownership) of immoveable properties.  

Property rental

The property rental legal regime in Portugal is a complex regime, therefore difficult to summarize in the limited space we have. The lease agreement is the contract by which one of the parties (landlord, usually the owner of the property) undertakes to provide the other (tenant or lessee) with the temporary enjoyment of an immovable property, through periodic monetary payments (rent). The lease agreement of urban properties may be for housing or non-housing purposes (for example, commercial purposes) and may also be of short duration for tourism purposes. The latter should not be confused with Alojamento Local, a specific regime for the tourist exploitation of properties. The lease agreement must be concluded in writing, under penalty of nullity. It is customary to certify the signatures of the contracting parties. In addition to the landlord and tenant, any guarantors, if any, will also be a party to the agreement. Usually landlords, before signing the agreement, ask tenants for proof of their income and for tenants to ask landlords for documentation relating to the property, such as an updated land registry certificate and caderneta predial, the use license, the energy certificate, or other relevant documents within the scope of the agreement. It is natural for landlords to ask for a deposit (which usually consists in a number of rents in advance) as a guarantee of compliance with the agreement and of repair of any damage to the property upon delivery following the contract termination. As we have already explained, the lease agreement must be concluded in writing and does not require any additional formalities, except if it is concluded for a period of more than 6 years, in which case it will be subject to registration. The lease agreement must include:

• Identification of the parties (landlord, tenant and guarantors (if any))
• The location of the property
• The date and number of the use permit and energy certificate
• Description of the property
• The purpose for which the property is rented
• The duration of the agreement
• The amount of the rent, the payment method and how it can be updated

The agreement must also provide for possible guarantees; in the case of housing rentals, the most common guarantees are the advance payment of rent and the existence of a guarantor, but they could also be bank guarantees or other types of guarantees that the parties consider appropriate. It is also common for the agreement to provide for rules applicable to its renewal, or opposition to it, whether and under what terms it may be terminated, rules relating to the maintenance and conservation of the property and how to return it at termination. It must be borne in mind that the termination of lease agreements for housing purposes is subject to an imperative legal regime. In agreements for non-housing purposes there is greater freedom for the parties to define these rules. Regarding the updating of rent, in housing agreements, takes place each year in accordance with the index published annually by the Government, which considers the values ​​of inflation. The general rule is that the tenant cannot transfer its contractual position or sublet the property without the landlord's prior consent. If the property is sold, the landlord's contractual position is transferred to the new owner. In this regard, it is important to note that, in certain circumstances, the tenant will enjoy the right of preference when the landlord sells the property. When the leased property is a family home, the law confers certain rights on the tenant's spouse, for example upon termination of the agreement, in the event of divorce, etc. It is also important to bear in mind that lease agreements are subject to registration with the Tax Authority, with a set of obligations regarding the issuance of rent receipts, declarative obligations and others of a tax nature that must be carefully evaluated and considered before concluding any such agreement.  

Last minute

Like in many other countries, Portugal has been experiencing a huge shortage of affordable housing in recent years, for the lower income classes and even for some segments of the middle class, in the main urban centres and its outskirts. This shortage occurs both in properties for sale and in properties for rental. There are many causes identified for this situation, some that have been going on for many years – such as the lack of harmonious development of the national territory, which has led to a concentration of the population on the coastal strip and, especially, near the large centres – and more recent ones, such as the increase in interest rates, the increase in inflation, the decrease in the number of homes built or under construction or, allegedly, the increase in demand from foreign investors willing to pay higher prices per square meter. There is no true consensus on the causes that give rise to the existing situation, nor on the solutions for it. However, everyone seems to agree that there is a problem. In an attempt to address this problem, the Government has been presenting a set of measures aimed at resolving the so-called housing crisis. Not all of these measures are consensual, nor have they been in force long enough for their effects to be measured. These measures consist, for example, of the possibility of converting commercial properties to housing use, without the need to review land use plans or use permits. Steps are also being taken towards simplifying licensing procedures, speeding up construction projects. A program was created, aimed at increasing landlords' confidence in the rental market, through which the State leases properties to owners, to sublease them to tenants who meet certain requirements. Limits were also introduced on the granting of new alojamento local licenses in certain areas of the country - new licenses will only be granted in rural areas - and a system of incentives will be created for the transfer of properties under alojamento local arrangements to rental. The end of the so-called Golden Visas (residence permit for investment) for real estate investment is another measure that has been approved to which can be added several other measures that it would be tedious to list here. What can be taken for granted is that legislation relating to the real estate sector has undergone, and will probably continue to undergo, many and, in some cases, profound changes. For that reason, any property owner or investor who intends to purchase a property in Portugal should be particularly attentive, actively monitor legislative changes that occur and, above all, seek advice from qualified professionals, especially lawyers, regarding how these changes may concretely affect its situation or plans.   Contributors: Real Estate and Construction department of Raposo Bernardo | please contact [email protected]