I feel the need to share this article because people constantly ask me about investing in real estate in Portugal. Here I will highlight three reasons why now is not the right time to be investing in Portuguese real estate.

I am simply laying out my investment thesis. This is not meant to be a hit piece on Portugal.

1. Prices have already risen a lot

Real Estate prices in Portugal have had a very good run, but the economic situation is changing fast with a a clear slowdown in the cards. I don’t see much upside here. The market needs to take a breather.

2. 90% of mortgages are based on variable interest rates

If you want to find out where not to invest in an environment of rising interest rates, look no further than this chart.

90% of mortgages in Portugal are based on variable interest rates. When the European Central Bank raises its benchmark interest rates, mortgage holders must pay more each month to cover the increased interest expense.

For example, “A customer with a loan worth €150,000 for 30 years, indexed to Euribor for six months and with a spread (bank’s profit margin) of 1%, will now pay €632.16, which translates into an increase of €170.83 compared to the last revision in May.” (Source)

In a country where the average monthly salary is about €1,200, this makes a massive difference.

This means two things:

• Forget about new buyers. They’ll struggle to even save money for the deposit and the increased interest expense will reduce their overall budget
• Many existing mortgage holders are going to find themselves underwater and unable to cover the rising mortgage expense on top of everyday life becoming more and more expensive (food, energy bills, etc). Expect delinquencies to shoot up (unless the government prints and hands out money to people)

This is categorically not a favourable environment for real estate investments in Portugal.

3. Courtesy of EU pressure, Portugal is killing its Golden Geese

Golden Goose #1: The real estate Golden Visa

The European Union absolute hates citizenship and residency by investment schemes. It forced Cyprus and Malta to eliminate and dilute their CBI pathways, and has put a lot of pressure on Portugal with regards to its Golden Visa program.

It was a great program. In a nutshell, non-EU people had to spend a few hundred thousand euros in real estate in Portugal, and they would obtain a golden visa for themselves and their family.

All they needed to do what to spend two weeks every two years in Portugal, and after five years they could apply for citizenship and obtain a great EU passport (in reality the process rather takes 7-9 years)

Needless to say, the program was a huge success and attracted substantial FDI. The EU did not appreciate it, and Portugal scrapped the real estate option for the Golden Visa in Q2 2023.

Why does this matter? Half of real estate purchases in Portugal used local financing, and the other half used cash.

All the Golden Visa cash purchases are now gone from the market. Also, amongst the cash purchases were a non-trivial amount of foreigners who managed to get bank loans from back home (English, German, etc), who are also suffering from inflation and rising interest rates. The actual cash market is smaller than these figures imply.

In any case, this Golden Visa cancellation is a big headwind for real estate prices in Portugal.

Golden Goose #2: Crypto friendly regulations

Portugal attracted tens of thousands of (mostly European) crypto investors due to its lack of capital gains on crypto. In early 2023 it changes the law to start imposing short term capital gains taxes of 28% on trades of less than a year. Long term crypto capital gains remain exempt. But nevertheless, expect thousands of young crypto entrepreneurial and traders to leave Portugal.

Golden Goose #3: the NHR program

The NHR program was what made Portugal a destination of choice amongst rich people. Essentially, if one moved to Portugal and applied for the non habitual residency status (NHR), then one would be exempt from taxes on most forms of foreign-sourced income, benefit from a reduced tax rate on employment and self-employment income, and get taxed only 10% on foreign pensions. This deal would last for a 10-year period from the start of the registration.

For Europeans, this was an amazing deal. People could leave high tax Northern Europe, move to Portugal and benefit from such an amazing deal.

For wealthy non-EU people, the NHR program combined with the real estate Golden Visa made Portugal a no-brainier destination.

The current socialist government decided to scrap the program by end 2024. People can still move to Portugal and get grandfathered in for their 10 years. However, what will be from 2025? A lot less wealthy people moving to Portugal and buying/renting property. This will inevitable result in less demand in the Portuguese real estate market.

However, to be fair, there are a few positives for investing in real estate in Portugal

There are a few positive catalysts for Portuguese real estate, but they do not outweigh the cons. However, I want to highlight them here as they are quite thought-provoking.

1. Costs of living crisis in Europe

As millions of Northern Europeans will increasingly struggle to make ends meet due to inflation and rising energy costs, many will look South to reduce their cost of living. Portugal is a very affordable place to live in the EU context, and is overall very pleasant, to say the least. This is a trend that will go on for many years and which will be beneficial for the real estate investment market in Portugal.

2. Energy from North Africa

Northern Europeans cut themselves off from their cheap source of energy (Russia). The direct result is an energy crisis and prices that are surging. Many countries will try to print their way out of the situation, but unless peace is reached with Russia, at some point the money printing will not work anymore and normal people and companies will have to pay extremely high prices for LNG imported from the US.

Portugal has less of an issue as it is mostly dependent on hydroelectricity, wind, and North African gas from Algeria, which should enable it to remain competitive and who knows, maybe even attract some industry.

3. The bug-out market is a niche real estate investment trend in Portugal

This is a small phenomenon; I don’t mean to exaggerate its importance. A small but growing contingent of Europeans want a Plan B away from potential large scale war in Europe. Portugal has historically been a safe haven, and its islands of Madeira and the Azores even more so. I believe we’ll increasingly see Europeans buying such plan Bs in Portugal.

However, the overall real estate investment outlook in Portugal is negative

Central bank policy and discouragement of foreign investment are too strong of headwinds for the time being. Prices of real estate in Portugal are very likely to go down. You cannot make a real estate investment in Portugal right now and earnestly hope for good rental yields and capital gains. One is likely to get neither.

I prefer the outlook in other markets

I find that Hungary offers better value overall, and that cash markets are king in a world of rising interest rates, as they don’t have leverage to the downside. Markets such as Montenegro, Mexico, Colombia are interesting cash markets, but they each have their own set of risks which must be taken into consideration.

With regards to Portugal, I’ll be sitting on the sidelines. Maybe I’ll venture into this market in the future, at attractive valuations. It’s not without good reason that real estate in Portugal has been so attractive in recent years as there is much to love about the country.

If you want to read more such articles on other real estate markets in the world, go to the bottom of my International Real Estate Services page.

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