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  • Writer's picturePaul Rees

Rental market chaos – where to invest

Skillfully renovated, historic properties rent at a premium

Portugal’s rental market is in turmoil with new licensing restrictions, higher taxation, an outright assault on rental apartment owners, confusion and a vote of ‘no confidence’ from owners failing or refusing to enter financial details to retain their existing Alojamento Local (AL) licences.

In Lisbon, Porto and most of the Algarve, no new AL licences will be issued for apartments until December 31, 2030, with townhouses and stand-alone villas exempted.

Is the tourist rental market in Portugal now unworkable or are there ways of increasing investment returns in 2024 and beyond?

Despite the politically motivated changes to the short- and medium-term rental market, Portugal remains a sound environment for investors; it all depends on where you buy.

Portugal’s rural interior, defined as those council areas with low population density, has avoided many of the recent unpleasant changes to the short-term tourist rental sector and is experiencing a healthy demand from those seeking double-digit returns from their investment properties.

Furnished or unfurnished for longer term rentals…

Municipal councils now decide on new AL licence applications. Inevitably, this will create delay and confusion as many municipalities may treat AL applications in the same way that they treat planning applications, leaving property owners waiting for years with no way of tracking progress and a policy of ‘zero communication’ the norm.

The outgoing Prime Minister, António Costa, claimed that he was seeking to ‘balance local housing needs with economy-boosting tourism’. It’s clear that he failed on both counts as there’s no evidence that low-income families have more low-rent property choices, but clear evidence that fewer registered AL properties now are available for tourism.

“These changes are turning back the clock on 15 years of progress because the State is making it impossible for owners to rent their properties legally. We know that demand for these holiday units has always existed, and AL was able to bring it over to the legal market, creating jobs and paying taxes along the way. Now we are taking a huge step back.”

Many old properties are being renovated for the rental market

Rental returns (ROI) in Lisbon show figures that struggle to exceed an annual 5%. Investors have been conditioned to expect a rental yield of 5-8% from Portuguese property, so how can this be increased?

Many of Portugal’s rural areas are experiencing perfect economic conditions of low property buying cost and above average income from medium- and short-term rental activity.

In the western Central Region, among other hot spots, there is a clear shortage of rental properties on the market combined with an historic oversupply of houses that can be repurposed as rental properties.

Quiet villages offer beauty and a warm welcome

Who is ‘renting rural’ and why?

Renters include those moving to Portugal and taking it easy for a time, while calmly researching to buy their ideal property. Others wisely choose to rent while their newly-purchased doer-upper is being renovated. Many are here to work remotely, including the new cadre of ‘digital nomads’ who don’t want the responsibility of property ownership but do want the peace, quiet and environmental benefits of living in Portugal’s interior.

Others attracted to living in the interior include nationals and foreigners who simply prefer renting, a perfectly valid choice, while their capital is deployed elsewhere.

Finally, rural tourism is undergoing a steady rise in demand as the cost of holidaying in the Algarve, Lisbon and Porto becomes prohibitive for many, easing people inland to reasonably priced destinations. Many, anyway, prefer holidaying in the countryside with its outdoor lifestyle, river-beaches and reasonably priced restaurants rather than crowded coastal resorts and cities.

Location is key, as with any property investment, but the figures are compelling. Coimbra-based Rural Properties works with investors to create AL-ready properties, taking older buildings in beautiful areas and adding them to the market for both short-term and long-term rentals.

Some investors choose small towns with year-round access to services

For those renting on annual contracts, prices in the west Central Region vary from €550 p.c.m. for a renovated T-2 cottage to €2,500 p.c.m. for a T-5 luxury country mansion with pool and extensive gardens. Expect to advance between one- and three-months’ deposit.

To the east of the region, in Castelo Branco nearer to the Spanish border, expect to pay €350-€450 to rent a T-2 village property and €850-€1,000 for a four-bedroom apartment in the city.

For those looking to buy and renovate, expect to pay €200-500 per m2 for a doer-upper and €600-800 per m2 in renovation costs.

Investors are savvy and are realising there’s still double-digit life to be found in the rental market despite the government’s efforts to disrupt a sector that was running smoothly and minding its own business.

Read the article in the Portugal Resident HERE.


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