Portuguese Economy at a Glance

According to 2023’s previsions, both the EU and the Portuguese Public Finance Council foresaw a substantial slowdown of the Portuguese economy, with a projected growth of 1% (EU forecast) and 1.2% (Portuguese forecast). This forecast relied on the expected stagnation of private consumption as a consequence of the higher interest rates.

However, the Portuguese economy outperformed projections and proved its resilience with a GDP growth of 2.3% for the whole year. Although the third quarter of 2023 was in decline (-0.2%), the final quarter of 2023 revealed a growth of 0.8%, therefore avoiding the Portuguese economy entering a technical recession (when two consecutive quarters of negative economic growth are registered).

In terms of the annual evolution of the main aggregates, exports were the biggest driver of economic growth, having increased by 4.2% in 2023. Domestic demand grew by 1.4% and private consumption contributed the most to this trend, with a rise of 1.6% compared to 2022. Public consumption grew by 1.2% and investment rose by 0.8%.

In fact, data show that the Portuguese economy continues a real convergence process with the EU, having grown more than double the rate of the euro area and the EU (0.5% growth) in 2023.

In 2024 and 2025, it is expected that the Portuguese economy will most probably continue to grow above the European average ‒ albeit at a lower rate. On an annual basis, the Portuguese GDP is expected to grow 1.2% in 2024 and 1.8% in 2025 against 0.9% in 2024 and 1.7% in 2025 in the EU.

As with more than half of the world’s population this year, Portugal also went through elections in 2024. The result of these elections led to the appointment of a minority government, which will have to crunch the numbers with the opposing political parties to ensure that government stability will not be deeply affected.

The Harmonised Index of Consumer Prices (HICP) inflation rate decelerated significantly to a 2023 aggregate of 5.3% (year-on-year) (compared with 7.8% in 2022). Annual HICP inflation is expected to drop to 2.3% in 2024 and 1.9% in 2025 in line with the euro area.

With the flattening of the inflation curve, European Central Bank interest rate cuts are expected.

Outlook for the Real Estate Market

The Portuguese real estate market took a “wait and see” approach in 2023. In fact, according to estimates by some of the leading real estate consultants operating in Portugal, there was a contraction in the volume of real estate transactions ‒ with a decline of approximately 50% compared to 2022. Nevertheless, around 70% of these investments came from international investors, which reflects the attractiveness of the Portuguese real estate market to international players.

In commercial markets ‒ more specifically, in transactions involving industrial and logistics (I&L) assets ‒ the market has matured, with demand increasing and diversifying. Despite the short supply, operators are beginning to select assets in different locations, which allowed the sector to diversify and expand. Office transactions accounted for around 10% of the commercial market.

Although there was a general decline compared to 2022, there was an increase in the volume of property transactions in the hospitality sector, which exceeded the figures recorded in 2019 (pre-pandemic period). Hospitality sector accounted for around 40% of the total commercial market. Revpar (revenue per available room) grew by 16%, to EUR72.1, and the occupancy rate (per room) stood at 66%. Portuguese hotels recorded approximately 70 million overnight stays, which reflects an increase of around 10% compared to 2022. In Lisbon there was an occupancy rate of around 75% and in Oporto there was an occupancy rate of around 71%.

In 2023, there was a downturn in purchase and sale activity in the residential market. Compared with 2022, there was a drop of around 15% in the number of residential properties sold in Portugal. There was also marked pressure on prices in the residential market ‒ with an average price increase of around 5% ‒ as a result of demand considerably outstripping supply. This scenario raises numerous challenges in terms of access to housing.

Another consequence of the shortage of supply is the increase of rent in all sectors. Prime office rent has reached a maximum of EUR28 per square metre per month. In the I&L sector, rents reached EUR4.75 per square metre per month. In the retail sector, rents increased by approximately 9%.

The first half of 2024 is still expected to be characterised by some stagnation, followed by a gradual recovery during the second half, with an increase in the volume of investments of up to 15% compared to 2023.

In the commercial market, in transactions involving I&L assets, secondary areas are expected to grow exponentially ‒ given the growing demand and saturation in conventional areas.

The hospitality sector is expected to remain a sector of strong interest to investors.

Investment in shopping centres is expected to increase and, as far as offices are concerned, it is estimated that around 40% of the offices planned for 2024 and 2025 are already pledged.

In the residential sector, there will continue to be a shortage of supply compared to demand ‒ despite the approval of the Urban Planning SIMPLEX (detailed below), which will have a considerable impact on speeding up and reducing bureaucracy in urban planning procedures.

Sustainable investments that comply with ESG standards are gaining momentum and significant investments of this nature are to be expected in 2024.

Portuguese Real Estate Legal Ecosystem

Housing remains the hot topic in Portuguese real estate for 2024. The Portuguese government has identified the housing crisis as one of the main pillars for intervention and introduced a multitude of legislative reforms with impact on the Portuguese real estate market. Those reforms will require all stakeholders and legal advisers to update their legal knowledge, adapt their perspectives and manage ongoing transactions.

New legislation

Mais Habitação programme

As anticipated, the Mais Habitação (“More Housing”) legislative programme ‒ comprising a series of structural measures, including several tax measures that revolve around the challenges and solutions to the housing crisis ‒ was approved (Law 56/2023) and published on 6 October 2023.

Some of the key aspects are listed below.

• The registration of new local lodging establishments, in the form of flats and accommodation establishments within an autonomous unit of a building, is suspended. However, there is an exception for properties located in inland areas, properties included in the Revive Nature Fund and in the Autonomous Regions of Madeira and the Azores.
• It is no longer possible to apply for this type of residence permit through the following types of investment:
1. transfer of capital in an amount of EUR1.5 million or more;
2. acquisition of real estate with a value of EUR500,000 or more; and
3. acquisition of real estate the construction of which has been completed for at least 30 years or located in an urban rehabilitation area and carrying out rehabilitation works on the real estate acquired, in an overall amount of EUR350,000 or more.
• The initial rent for new residential leases for properties for which there have been lease agreements signed in the five years prior to the entry into force of the law may not exceed the value of the last rent charged for the same property in a previous agreement, with a coefficient of 1.02 applied.
• A scheme will be created to support the development of housing for affordable rental and student accommodation, by creating lines of funding and by concession of public land and buildings.
• Income from residential leases will now benefit from a reduced personal income tax rate of 25% (compared to the previous rate of 28%). The reduced personal income tax rates applicable to rental income from residential leases, determined according to the duration of the contracts, are revised as follows:
1. =/>5 years and <10years ‒ 15% personal income tax rate (additional reductions of 2% apply, up to a limit of 10%, for each renewal of equal duration);
2. =/>10 years and <20years ‒ 10% personal income tax rate; and
3. =/> 20 years ‒ 5% personal income tax rate.
• Buildings in full ownership or autonomous units allocated to the Lease Support Programme may be eligible for property transfer tax exemption (on acquisition of land for construction) and municipal property tax for three years from the year of purchase, inclusive, which can be renewed at the owner’s request for a further five years.
• The Landlord and Tenant Desk (Balcão do Arrendatário e do Senhorio, or BAS) has been created to replace the current National Letting Desk (Balcão Nacional do Arrendamento, or BNA) to handle the special eviction procedure and injunctions in the field of leased property, and provision is made for the respective procedures.

Urban Planning SIMPLEX

Included in the Mais Habitação programme, Decree Law 10/2024 was published on 8 January 2024 to reform and simplify town and country planning procedures and certain related matters (SIMPLEX).

In this context, several pieces of legislation have been amended, such as the Legal Framework for Urban Development and Construction (Regime Jurídico da Urbanização e Edificação, or RJUE), the General Regulations for Urban Buildings (Regulamento Geral das Edificações Urbanas, or RGEU ), the Legal Framework for Territorial Management Instruments (Regime Jurídico dos Instrumentos de Gestão Territorial, or RJIGT), the Law on the General Principles of Public Land, Spatial Planning and Urban Planning Policy and the Legal Framework for Urban Rehabilitation. These can be summarised as follows:

• simplifying licensing procedures, with some relevant operations being dependent on a mere prior communication (comunicação prévia), rather than an ordinary and usually more lengthy licensing procedure;
• the use permit certificate has been abolished, so it is no longer necessary to present such a document when transferring ownership of urban property;
• the authorisation to carry out the urban development operation will now be proof of payment of the respective fees and there will no longer be such a thing as a “building permit certificate” (alvará de licença de construção);
• when signing a public deed for the acquisition of ownership of a building or unit intended for residential use, it is no longer necessary for the notary to certify the existence of the technical data sheet for the dwelling and that it has been handed over to the buyer;
• with regard to the technical rules for the preparation of urban construction projects, it has been established that these will be defined by the competent personal orders and as part of the development of the Construction Code by 1 June 2026; and
• mechanisms have been introduced for a simplified procedure of reclassification of rural land as urban land ‒ namely, if the land is intended for the establishment of activities of an industrial, warehousing or logistics nature and related support services or for dry ports for cost-controlled housing or residential use.

All these measures are expected to bring a new dynamism to the real estate market.

Rent updates for 2024

In 2023, a law was passed that set a cap of 2% on rent increases in 2023 for lease agreements that are subject to the legal annual update coefficient for rents (which includes all leases that provide for a specific rent update or in the absence of a specific regulation). This law placed strict limits on the situations in which the legal coefficient would normally apply. The legal coefficient results from the variation of the consumer price index and is provided for in the New Urban Leasing Rules (Novo Regime do Arrendamento Urbano, or NRAU). If it were to be applied in 2023 to the different types of leases (both urban and rural), the rent increase coefficient would have been of 1.0543 (5.43%).

However, such limitation will not take place for 2024 and the legal annual update coefficient of 1.0694 (6.94%) will apply (Notice No 20980 A/2023 published in the Official Gazette), unless otherwise agreed by the parties.

Alongside the above, Decree Law No 103-B/2023 of 9 November has reinforced the application of extraordinary and temporary support measures for families in the context of housing, previously approved by the Decree Law No 58/2023 to mitigate the effects of inflation and rising interest rates on housing credit. This legal regime provided for:

• support for the payment of rent from a lease or sublease of first dwellings, corresponding to the difference between the value of the rent and the amount that would be paid if the effort rate was 35% of the average monthly value of income up to a maximum amount of EUR200 per month; and
• support for the payment of loan agreements for own and permanent housing, corresponding to a percentage (75% or 50%, depending on the income bracket) of the difference between the present value of the indexer and the value of the indexer at the start of the loan plus three percentage points, with a minimum of three percentage points, up to a maximum amount of EUR720.65 per year ‒ in the case of an effort rate of 50% or more, the bonus can cover the difference between the present value of the indexer and the threshold of three percentage points.

As stated, the extraordinary and temporary support measures were reinforced to accommodate the legal annual update coefficient for 2024. Therefore, the monthly amount of the support is calculated ‒ as from 1 January 2024 ‒ on the basis of the monthly rent value updated by a coefficient of 1.0494 (4.94%).

2024 State Budget

Property transfer tax brackets update

The 2024 State Budget provided for an update of 5% on the progressive brackets of the property transfer tax (Imposto Municipal sobre as Transmissões Onerosas de Imóveis, or IMT) applicable to housing urban properties.

Non-habitual resident tax regime

The non-habitual resident (NHR) tax scheme that allowed individuals to benefit from a special tax status for a period of ten years was revoked. Nonetheless, it is still applicable to the ongoing tax schemes and to individuals who become tax residents until 31 December 2024, under certain requirements.

National System of Cadastral Information and the Cadastral Charter

New rules governing the land register were approved in August 2023, with emphasis on the creation of the National System of Cadastral Information (Sistema Nacional de Informação Cadastral, or SNIC) and the Cadastral Charter. The purpose is the creation of a tool that allows citizens and organisations to know exactly the location of their buildings and exercise their rights and duties safely.

If the inherent difficulties of its implementation can be resolved, it may become a very valuable resource for the flexibility and safety of real estate transactions, especially those involving rural properties.