Beliche beach and cliffs, Sagres

Air travel is currently restricted to journeys deemed essential. This will be relaxed in the coming weeks, but with capacities cut to allow social distancing and with passengers likely to require masks.

Ryanair has extended its reduced service schedule until 14th May. They are operating emergency services from Dublin and from London Stansted to Lisbon, but not to Faro. Aircraft are regularly disinfected and passenger numbers on these flights are low. A “normal” schedule will not be resumed until 17th June at the earliest. The Jet2 flight schedule is also due to resume on 17^th June.

Easyjet has currently grounded all aircraft, and will not be resuming flights until the end of May at the earliest.

BA is offering a voucher to re-schedule any flight booked with departure before 31st July. It has also announced plans for dramatic staff redundancies and a reduction or phasing out of services from Gatwick.

Tourism travel to resume

It is likely that tourism travel will resume earlier between the more popular European destinations. Tourism “corridors” are being considered to connect member countries least affected by COVID-19. Croatia, for example, has said that it will provide guests from the Czech Republic and Slovakia with special access to its beaches this summer.

Given this partial resumption, it is likely that:

• With higher flight prices, the average traveller will be more affluent
• Travellers will prefer less crowded destinations with a good record of limiting infection
• Self-catering facilities will be preferred
• A private pool and/or proximity to un-crowded beaches will be preferred

At the airport

Enforcing social distancing and hygiene will remain absolute priorities for airports, airlines, car rental companies and tourism destinations.

Use of automatic check-in terminals will be encouraged. Hand sanitising will be required both before and after security. Sanitising may well extend to both carry-on and checked baggage, with baggage handlers also wearing masks and gloves.

The check-in process will inevitably take longer. Passengers are likely to be screened, but the process will vary. Some airports are looking at infra-red temperature-taking, even though many infected people present as asymptomatic. Some are considering whole-body disinfecting devices. At Dubai airport, Emirates is offering passengers actual COVID-19 blood tests, with results within 10 minutes.

On board and on arrival

It is likely that both passengers, staff and flight personnel with be obliged to wear masks. American carriers have already announced compulsory mask wearing from embarkation to debarkation.  Some airlines are issuing flight attendants with full PPE.

The airline will have stepped up its hygiene and cleaning protocols, to include the sanitising of tray tables, armrest, safety belt and washrooms.

You won’t need to share an armrest, as middle seats will remain empty, at least in the early phase of relaxation, but losing a third of seats will squeeze airline operations and force price increases.

Similar airport distancing and hygiene procedures will also be in place on arrival. Car rental companies should have cleaning protocols to ensure that your car is suitably disinfected.

The Portuguese Hotel and Restaurant Association is developing a Code of Good Practice to ensure that hotels and other tourism lodging establishments observe appropriate social distancing and hygiene protocols.

Hotels may be required to limit occupancy in the same way as airlines and restaurants, ensuring for example that every other room remains unoccupied. Hotel swimming pools are unlikely to be opened this summer. Buffet meals will be replaced with a la carte, and with dining area capacity limited to comply with social distancing.

The benefits of a villa holiday at AlmaVerde

Portugal has outperformed all other major European countries in containing the outbreak (see last two blog articles).  Infection in the Algarve is well under control with no new infections in four of the past seven days (to 3rd May).

There have been no infections at all  in the most western Algarve municipalities of Vila do Bispo, Aljezur and Odemira. The only cases in Lagos have been the few that were transferred to the private hospital from other hospitals further east. AlmaVerde is situated in the municipality of Vila do Bispo.

AlmaVerde is situated at the gateway to the vast and sparsely populated Costa Vicentina Nature Park that encompasses 150 km. of coastline, from the nearest beach at Burgau, along the south coast to Cape St. Vincent and up the west coast as far as Sines. The beaches here are among the most beautiful, undeveloped and uncrowded in Europe, with plenty of space even at the height of a normal summer.

AlmaVerde itself is surrounded on three sides by rustic land, with no casual pedestrians, other than for other residents out walking their dogs or exercising.

Villas are set within private landscaped grounds, each with its own private pool and fully equipped kitchen. Detached villas are separated by a minimum of 10 metres from their neighbours.

Access to villas is controlled by key safe and alarm codes. There is no need for person-to-person check-in. Food and beverage hospitality packs can be ordered for arrival. Local supermarkets and a number of restaurants will also deliver. Reception will be open five days per week for concierge services, with staff wearing masks and observing hygiene protocols.

AlmaVerde will follow the hygiene guidelines for cleaning, sanitising and laundry handling set out by the Portuguese Hotel and Restaurant Association.

Prior to arrival, the villa will have been scrupulously cleaned and sanitised, and left empty for at least 18 hours. The clean bed linen and towels provided on arrival will have been freshly laundered using high temperature machines and will not previously have been used for a minimum of one week.

Portugal has been successful in stabilising the COVID-19 outbreak (see previous blog article) and is now starting to relax its lock down restrictions, but with a continued emphasis on strict hygiene and social distancing.  The government will continue to assess the situation and will not hesitate to re-impose tighter rules to maintain control.

The following rules are now effective:

Mandatory home confinement will continue for the sick and those under active surveillance

Mandatory tele-working will continue until 1^st June for those who can operate remotely. From 1^st June, businesses that cannot function remotely will re-open

Gatherings are limited to a maximum of 10 people, and funerals are limited to family members.

Regarding public transport, use of masks is mandatory, with capacity limited to two thirds of normal, and with special hygiene and cleaning measures in place

From 4^th May, the following can re-open:

• Clinics and dental offices but by appointment only and with users to wear masks
• Customer service counters but by appointment only
• Retail units of under 200 sq.m. with a limit of 4 people per 100 sq.m.
• Hairdressers and beauticians but by appointment only and with rules of hygiene and PPE in place
• School classes for 11^th and 12^th year students
• Libraries and archives
• Individual sports places such as tennis courts, but with changing rooms remaining closed

From 18^th May, the following can re-open:

• Retail units of between 200 and 400 sq.m. with a limit of 4 people per 100 sq.m.
• Restaurants, cafes and pastry shops but with capacity of 50% of normal
• Museums, monuments, palaces, art galleries and exhibition rooms

From 1^st June, the following can re-open:

• Retail units larger than 400 sq.m. and shopping malls
• Cinemas, theatres and concert halls
• Day care centres, ATLs and pre-schools

Statistics over the past few days have shown a further tailing off of new cases and deaths with the 7-day average for new cases to 3^rd May being less than half of that for the previous 7-day period. In the Algarve, there were no new cases in four of the past seven days.

Portugal had more time to prepare

Spain’s first case was reported on 31^st January. Community transmission had begun by mid-February. The risk was originally under estimated, with a national lockdown only imposed on 14^th March. By this date the infection had already spread to all 50 provinces, with a total of 6,391 cases already confirmed by that date.

By contrast, the infection arrived in Portugal much later, and emergency measures taken much earlier in the transmission process. Portugal´s first cases were reported on 2^nd March. By 12^th March all schools were closed, and by 18^th March a full State of Emergency was declared.  At this time only 642 cases had been confirmed.

People respected the containment measures

The reaction of the Portuguese people to the austerity measures introduced in the wake of the 2011 euro crisis revealed much about the national character. However much they may have grumbled, the people knuckled down and accepted the longer working hours, etc., as a price they had to pay to ward off the greater evil of Euro exit.  The Portuguese gained international respect for their resilience during this difficult time.

The lockdown measures were passed with little political opposition, and have been accepted and followed in the same spirit of social cohesion. There is wide recognition that they are for the ultimate common good.

The government has also been proactive in introducing a wide range of emergency measures to mitigate the financial impact on businesses and workers.

 What happens now?

The State of Emergency is due to end on 2^nd May, with many shops and offices reopening on Monday 4^th May. The government is meeting on 30^th April to determine the rules that will apply to this new phase.

The Statistics

Highest rate of testing in Europe

As at 29^th April, Portugal[1] had tested 37,223 people per 1m population. This is the highest rate for any European country, other than for city states like Luxemburg.

Germany is generally considered to have responded very well in protecting their citizens, but its testing rate is only 65% of the Portuguese figure. The UK testing rate in less than half of the German rate and the French rate significantly lower even than the UK.

Low death rate similar to Germany

Death rates show a strong inverse correlation with testing rates but are also affected by the quality and scope of healthcare resources available. On this macabre score Germany has outperformed Portugal with 75 deaths per 1m population compared to 93 for Portugal. In terms of % deaths to confirmed cases, Portugal and Germany are very close, at under 4%.

However, the UK death rate per 1m population is nearly 3.5 times higher than the Portuguese figure and the French rate nearly 4 times. The UK death date as a % of confirmed cases is nearly 3 times higher than in Portugal or Germany.

Infection and death rates on a downward trend

Looking at the progress of the infection, the following chart shows the number of new infections reported per day from 2^nd March to 28^th April:

Deaths per day are now showing a similar downward trend.

Limited infection in the Algarve

At the height of the lock down, over the Easter weekend, no travel was even permitted across municipal boundaries. This was helpful in containing the outbreak in the Algarve, as otherwise many holiday home owners from Porto and Lisbon would have made the trip south.

As it is, the incidence of daily new cases in the Algarve peaked at 28 on 5^th April, and has been been running at an average of under 3 cases per day since 10^th April.  The number of deaths as a percentage of confirmed cases has been similar to the national average at under 4%.

The following chart shows new cases and deaths in the Algarve from 2^nd March to 28^th April:

No infection in the Western Algarve

Of the 330 cases so far detected in the Algarve, 58% are in the three central Algarve municipalities of Albufeira, Faro and Loulé. There are fewer cases in the municipalities further east, west and north. There have been no reported cases at all in the far western municipalities of Vila do Bispo, Aljezur or Odemira. There were only three cases reported in Lagos, and these were transfers from hospitals in other municipalities.

[1] https://www.worldometers.info/coronavirus/

The little known truth is that Portugal has a startup industry like few others. At just 10 million people and a GDP of just $18,300 per capita, Portugal is punching above its weight. And it has proof.

Ever heard of Farfetch? Farfetch is the fashion industry’s latest ‘Unicorn’, meaning its capitalization is over $1 billion. Beautiful isn’t it?

And guess where the entrepreneurs who make these new conglomerates are coming from: Portugal. The founder of Farfetch, José Neves, has been in Portugal’s fashion startup scene for decades. Now he’s making it big worldwide, with international offices in New York, Los Angeles, Shanghai, Tokyo, and many more cities. Talk about explosive growth.

There’s lots more too; I’d know. As a marketer and copywriter, I help startups like these grow. Here’s a few more:

1. Uniplaces is the new booking service for university students. Uniplaces has over $27 million in bookings and isn’t stopping anytime soon. They just received $24 million in venture capital to expand even faster.

2. Aficionata, Lisbon’s ‘Farfetch for Lingerie’ is the latest break into the Iberian fashion industry. They’re already building clientele and aim to become the go-to source for high-end lingerie in Europe.

3. Issho Technology, Braga’s latest contender into the manufacturing technology industry. Issho Technology aims to revolutionize custom furniture design and manufacturing. Their technology lets you create, modify, and show a custom designs while handling all the back-end work from material costs to packaging instructions. Manufacturers create the customer’s design, and everything is done, thereby saving them countless hours.

And here’s a few more up and coming Portuguese startups:

4. Merkatsu, which aims to be the world’s internet hub for niche marketplaces. They let anyone create a beautiful, easy-to-operate store in seconds while promoting their products at the same time. They’ve already partnered with several of Portugal’s leading markets and associations, including Portugal Sem Gluten and Feira Das Almas in Lisbon.

5. Getsocial, Portugal’s answer to social media analytics. Getsocial, run by João Romão, has expanded massively into the American market with thousands of American corporate customers already in love with their service.

There’s so many others. Lisbon is crawling with innovative startups, in tech and otherwise, aiming to change the world. And they’ll do it.

Why are they choosing Portugal? There’s many reasons, but my clients tell me the same again and again. They are:

1. Portugal is innovative. Both Lisbon and Porto are bustling with energy, and there’s even growing startup communities in the Algarve, Alentejo and Coimbra.

2. Portugal is a great place to live. Every entrepreneur I know raves about the beauty of the Algarve and surfing is a common passion for founders here. Portugal, and the Algarve in particular, gives up and coming entrepreneurs a place they can work in and love living in. It’s paradise.

3. Portugal is cheap. Startups start small, often on shoestring budgets. That Portugal, and the Algarve in particular, is of such low cost shows that it’s the place to be. 

So there you have it, that’s the basics. Portugal is beautiful, but more than that Portugal is creating startups that are making waves. They’ve already rocked the fashion industry, who knows what else they’ll change in the future. Startup culture has come to Portugal, and it’s here to stay!

About the Author – Mitchell J. Loureiro

Mitchell is a Lisbon-based Marketing Consultant and Startup Copywriter. He specializes in helping startups demonstrate their value and break into new markets, with clients such as Barcelona’s iLovePDF and Reality-Connect. You can learn more about him at his website or read his blog at http://www.liegegroup.net/blog/.

AlmaVerde’s lime kiln

The area around AlmaVerde lies towards the western end of the Barrocal, a hilly, geological sub-region running East-West across the Algarve, between the higher Serra to the North and the flatter, coastal Littoral to the South. The Barrocal  is characterised by the prevalence of calcaric rock at various depths.

Around AlmaVerde, the fractured limestone is exposed on slopes and is very close to the surface in level areas, covered only by a thin layer of sand or clay. For this reason, the area was a centre for the production of cal or lime for hundreds, if not thousands of years.

Lime has been used in construction from the earliest times, in mortar, as a stabiliser in mud floors and renders, and as an external protective and decorative coat in the form of whitewash.

Even today, if you travel by bus along the N125, and ask for the fornos de cal – the lime kilns – the driver will stop at AlmaVerde’s old entrance, close to the tennis courts and to the kiln that AlmaVerde rebuilt and fired in 2001, with its characteristic, pointy-headed , cupola or domed cover.

Continuing west past AlmaVerde on the N125 there is a pottery shop with the shape of a cupola in its roofline. This was incorporated into the design by local architect Guy Quintino in recognition of the historical importance of lime kilns to the area.  Next to the new roundabout between AlmaVerde and the pottery shop, is a structure that was formerly two lime kilns, now sadly without its cupolas.

In the wake of the 1974 revolution, lime production suffered a similar fate to other traditional, labour-intensive occupations such as sardine canning and small-scale agriculture, being replaced by tourism and construction as the main engines of the Algarve economy. The traditional kilns were abandoned.

 The restoration

By 1995, all that remained of the kilns were their bases. The idea for the restoration started after I met João, then a gardener at Luz Ocean Club. Already well into his 60’s, he grew up in Barão S. Miguel. His father was the man who operated the kilns on site, until their demise.

While cleaning out the base, João came across a nest of three large Montpellier snakes. He killed the snakes and took them home, saying what a good meal they would make, but he was wrong. Whether he ate the heads, where a low-toxicity venom is stored, or whether he simply ate too much, he was ill for a week.

The plan was to build a new lining inside the old one, so that the new structure could continue without a break, up into the cupola. The integrity of the lining at the base of the cupola is important because rectangular holes must be left at regular intervals all around it, to help the fire to breathe. The new lining must be built from a material that does not break up at the same temperature as the calcaric rock. The traditional material was a locally-occurring red sandstone called pedra ruiva.

João left much of the early work to another fellow who would generally be roaring drunk by lunchtime. His low productivity was inflating the budget and so he had to go.  João continued the rebuilding at his own expense, on the understanding that he would be able to retain the proceeds from the lime sales following the first firing.

The firing

Quite how labour-intensive lime production could be became clear when the restored lime kiln was fired.

The rocks were first piled up in spirals against the inner, circular wall, following the shape of the dome, and interspersed with plenty of branches and other flammable material. In the 1960’s, when the kiln was in regular use, fuel sources even included rubber off-cuts from a local shoe factory.

The central space at the base was left clear until all the rock was in position, and then filled with dry timber to get the fire going. The stokers needed plenty of fuel on hand close to the mouth or “eye” of the kiln, so that the fire could be continuously fed and its temperature driven up. The target temperature is 900^oC, the critical level at which calcium carbonate (CaCO3) starts to separate into calcium oxide (CaO) and carbon dioxide (CO2).

In a traditional kiln of this type, and with more efficient fuels such as coal or even rubber, the firing process can take as little as three days but, with only timber as fuel, the 2001 firing actually took a marathon thirteen days and nights.

The firing developed an impressive rhythm, with each stoking causing an in-breath of air followed by a low-pitched “whoomp”, as tongues of flame shot out through all of the openings at the cupola’s base.

The work required a minimum of two men at all times, with three or more for all but the small hours. The total labour required was well in excess of a hundred man days. This made it clear why rubber would have been preferred as part of the fuel mix, as its higher burning temperature would have shortened the total firing time.

Once the limestone has been reduced to quicklime, the kiln must be left to cool for a couple of days. The quicklime can then be shovelled out and bagged up. It must be handled carefully, as it reacts violently with water to create slaked lime or calcium hydroxide. It is actually in the slaked form that lime is used in most building applications.

The single firing produced around forty metric tonnes of quicklime, which was enough for João and his team to pay themselves at the minimum wage, but not enough to properly reward all the overnight and weekend hours involved. By the end, João was completely exhausted and swore that he would never do it again.

Lime production and the environment

Carbon dioxide is a greenhouse gas, so the process by which limestone is heated to release carbon dioxide might be considered to contribute to global warming. However, common applications for the residual quicklime generally result in a two-stage conversion back to calcium carbonate. Firstly the CaO is slaked with water to produce Ca(OH)2 and then, left to “dry” in air, the slaked lime not only releases water vapour but absorbs back the carbon dioxide:

Ca(OH)2 + CO2 – H2O = CaCO3

Thus whitewash, when dried, becomes a wafer-thin layer of calcium carbonate.

It is not the lime cycle that generates the atmospheric carbon so much as the burning of the fuel used to heat the limestone. An environmentally responsible approach would be to ensure that the release of carbon through the burning of timber is offset by the planting of new trees that will grow to re-absorb the carbon, in other words that any forestry used to support lime production is sustainable.

John Tranmer

The ECB has finally embarked upon quantitative easing that, had it been applied at the onset of the euro crisis in 2011, would have gone a long way to avoiding the subsequent Portuguese credit squeeze and property bust.

Instead, three years of austerity plunged Southern Europe into deflation while German exports continued to benefit from a reasonably priced euro. Germany could well afford to sit tight while its growing sales to China more than compensated for shrinking sales in Europe.

Only now that China has gone off the boil, and the dog of deflation is snapping at Teutonic heels, has it become politically acceptable to boost the euro zone with the same type of stimulus that was initiated in 2008 to rescue the US and UK economies.

The immediate effect of ECB QE is likely to be euro devaluation, fuelling exports from the single currency zone, rather than directly improving liquidity and bank lending.

It is already happening. The pound, valued at 1.5 euros at the beginning of 2007, fell with the help of QE to a low of 1.04 at the beginning of 2009. It was still only 1.13 at the end of 2011. Now, with euro QE a fact, the pound is back up to 1.33 euros, a level last seen at the beginning of 2008 on the way down.

It was then that rising prices collided with the falling pound to make Algarve property look too expensive to Brits, the region’s most prolific buyers. Prices came off their highs and the market continued to limp along until the euro crisis exposed the fault lines in the single currency project. Mortgage finance dried up, confidence drained away, and the smart money was on the euro zone breaking up.

It seemed that the only logical alternative to collapse would be federalisation, with fiscal policy convergence, liability-sharing through eurobonds and the like. The ECB got a new boss, who promised to do whatever it would take to keep the euro zone together, but German fiscal conservatives were quick to quash any moves that might mean German taxpayers’ having to pick up the bill for Club Med fecklessness. Instead, those economies, suckered into a spending spree by the low interest rates that came with euro membership, would have to pay for their folly through austerity.

In return for bail-out cash, Club Med had to submit to the “troika” recipe. Some ingredients – freeing up the labour market, dismantling quangos, improving tax collection – were palatable; others far less so, Tax increases and budget cuts aimed at reducing deficits actually had the opposite effect, throwing people out of work, depressing output and causing deficits to balloon as a percentage of GDP.

In a currency union of equal partners, such pain and sacrifice must surely be mitigated by measures to stimulate growth and/or reduce debt. With austerity alone failing to deliver, the rest of the world wondered when the euro zone might ever take the tonic to cure its ills.

Now we know the answer: when it was right for the German economy. And it becomes clear that the euro zone is not a union of equal partners but a zone dominated by the needs of its largest member.

For this to change, large chunks of the non-German euro zone must form a coherent bloc to challenge German dominance. France, Italy and Spain together could act as an effective counterweight. A proper democratic election to vote in the leader of the European Commission would also be a positive step. Otherwise the euro zone will remain the federation of greater Germany, a federation in which only the Germans get to vote in the leader.

Back to parochial concerns. With the euro falling against the pound, conditions are finally right for an Algarve property recovery.

The UK economy is growing, UK property prices are back above pre-crisis levels and British buyers, never less than half of all foreign buyers of Algarve property, have a spring in their step. Meanwhile Algarve prices are still scraping along the bottom, at a third or more below their peak.

Add in the demographic growth in retiree numbers, the tax breaks now on offer for taking up residency in Portugal, and the Golden visas available to non-EU property investors, and it is no surprise that the December 2014 RICS/CI Portuguese Housing Market Survey is the most bullish to date.

New buyer enquiries have now been on the increase for seventeen successive months, transactions volumes have been growing for twelve, and confidence is at its highest since the survey began in Q3/2010. After years of falls, prices are now considered stable, with a modest rise predicted over the next three months. Banks are lending again.

The provisional Knight Frank Global Price Index for Q3/2014 reported a modest year-on-year rise of 1.5%, with a fall in the first six months more than balanced by a 3.6% rise in the last six months.

John Tranmer
Feb 2015

Portugal is exiting its three-year €78bn bailout on 17 May without requesting a standby line of credit. The loan had been granted in May 2011 by the European Union and the International Monetary Fund. Since then Portugal has stuck to the tough measures mandated by the bailout.

“The government had decided to exit the assistance programme without turning to any kind of precautionary programme”,  Prime Minister Pedro Passos Coelho told national television. The decision was the “best for the interests of Portugal” after the country “regained its credibility,” he added.

This follows a successful sale of government bonds in April, when yields on its 10-year government debt fell to an eight-year low of 3.58%. Investor interest in the €750m bond auction was such that it was three times over-subscribed. The yield on 10-year bonds had stood at 5.1% in February.

Portugal’s “clean exit” route followed Ireland’s in December, when it became the first eurozone nation to exit a bailout. It also follows more than a year of upward movement in Portugal’s economic climate. Industrial production continues to grow, whilst the contraction in the services sector is tailing off. The rate of contraction in the construction sector is also falling.

Q1/2014 saw the third successive quarter of GDP growth (+0.6%) after ten successive quarters of contraction. Although GDP is now increasing, the 2013 figure was still nearly 16% below its peak in 2009.

This improvement is mirrored by modest increases for the past four successive quarters in the number of persons employed, after a declining trend for the previous nineteen quarters. There are still 666,600 fewer people employed than at the peak in Q2/2008.

The employment figures would be worse if not for an exodus of working people. The overall resident population shrank by 159,000 over the past three years.

In 2013, the trade deficit narrowed 15% over the previous year, to €9.28bn, the lowest since 1996. This was achieved through a combination of increasing exports and reducing imports. Exports have been growing, while the austerity measures have depressed domestic demand. The deficit has widened again in 2014, perhaps as a result of pent-up demand for imports. New car registrations, for example, were 28% higher in Q1/2014 than in Q4/2013.

The golden visa programme has already delivered a decisive stimulus to the real estate market, being responsible for over €400m in incoming investment in less than 18 months. The non-habitual residency tax regime is also stimulating new demand for retirement real estate.

However, the eurozone economic picture is marred by very low inflation overall, with outright deflation in the peripheral economies. Eurozone inflation dropped to 0.5% in March. Greece saw price disinflation of 1.5%, Portugal of 0.4% and Spain 0.2%, while Italy, the Netherlands and Denmark are as close to falling prices as makes no difference.

Jeremy Warner of The Telegraph comments, “The line being taken in Brussels is that this is not damaging deflation but rather ‘relative price adjustment’ with some countries are being forced to adjust their prices and wages in order to become more competitive with others. The problem with this analysis is that if relative price adjustment is the intention, then you would still want to manage your affairs so as to meet an overall 2 per cent inflation target, for the same effect can just as easily be achieved simply by having a higher inflation rate in the eurozone’s more competitive core.”

This talk of competitiveness is framed to sound as if Portuguese producers and workers want more for their products and services than the market will bear, but this is certainly not the only reason for the need for adjustment.

According to Eurostat, the 2011 average annual earnings in German industry and services were €42,900. By comparison, earnings in Portugal were €17,741, a mere 41% of the German figure.

Are we really saying that Portuguese workers produce less than 41% of their German counterparts, and so must continue to accept wage cuts in order to achieve parity?

This myth of lazy, feckless Club Med workers being unable to raise productivity is unfortunately still pervasive, and has underpinned the one-sided emphasis on austerity as the solution to the euro crisis.

Whole sectors of the Portuguese economy, including Algarve residential tourism construction, were made “uncompetitive” simply because they were selling to markets unable to accept the 20% + premium that the euro started to command at the end of 2008, following the devaluation of the pound and the dollar by quantitative easing.

Without the counterweight of the “weaker” Club Med economies to hold down the value of the euro, German exporting strength would have pushed up the value of its currency to “uncompetitive” levels.

The ECB has recently expressed concern, not only for the deflationary trend, but also for the persistently high value of the euro. It is now sending signals to prepare the markets for some further fiscal easing to address these issues.

Some inflation will be helpful to Portugal in reducing its debt burden, while even a mild devaluation of the euro will be a boon to exporters and to the residential tourism market.

May 2014

1.   Portuguese market bottoming out

There were already signs of market recovery towards the end of 2013. Collating results from 100 collaborators, SIR (Sistema de Informacao Residencial) reported an increase of 40% in sales volumes in the Lisbon Metropolitan area for the first 9 months of 2013 vs. 2012. The rate of increase for Porto was 18%.

The RICS/CI Portuguese Housing Market Survey for February 2014 reports a rise in new buyer enquiries for the seventh consecutive month. This has already led to a modest rise in sales. It is anticipated to result in continued sales growth across all three regions of Porto, Lisbon and the Algarve.

The survey also reports a continued slide in house prices, but with the pace of decline slowing significantly. After two years of visible price falls, the sustained improvement in both sales interest and volumes indicates that a floor is approaching, with buyers finally able to find deals at sufficiently attractive prices.

Banks are now moving back into the market for non-residential mortgages, with spreads coming off the recent and discouragingly high levels of 4.5% to 5% over EURIBOR. BPI, for example, is offering a spread of as low as 2.9% for sufficiently well qualified applicants.

There is plenty of anecdotal evidence to suggest that agents have been enjoying much higher sales enquiries and volumes, and that contractors who have survived the downturn are now increasingly busy.

2.   Portugal cheap vs. International norms

Property in Portugal is less than half the price of property in Spain, according to the Global Property Guide. The guide compares prices for similar apartments in the centre of most important city in each country, and concludes that, with an average price of €1,760 per square metre, Portuguese property is among the cheapest in Europe. Only Montenegro, Bulgaria, Macedonia and Moldova are cheaper.

Gross rental yields in Portugal, at 4.36%, are in the middle of the pack, comparable to Belgium, and slightly better than Spain.

Research by the OECD last year suggested property in Portugal was undervalued by 5 to 10% when price ratios for rents and wages were compared with the long-term average.

Portugal’s market was estimated to be cheaper than any of the other bombed-out Mediterranean states. Spain was said to be as much as 20% too high.

Portugal is clearly an attractive cyclical bet, but large scale investment may be limited by lot size and available investment vehicles. Bill Gates and George Soros have both recently made €100m bets on construction recovery in Spain. Portuguese prices are lower, and the backlog of unsold properties is far smaller on any measure, which should result in an earlier market recovery in Portugal than in Spain.

3.   Sales interest booming on international portals

The Rightmove Overseas 2013 Consumer Survey reports an overall 30% increase in enquiries sent to agents vs. 2012.

The number of leads passed to Portuguese agents in January and February 2014 had already reached nearly 50% of the total sent in the whole of 2013.

70% of people searching on Rightmove Overseas are from the UK. 51% of searchers are looking for a second home and 36% are actually looking to emigrate. Portugal ranks a healthy 5^th among destinations where people are looking to buy, and the Algarve is far and away the most popular region within Portugal.

4.   Sustained downturn translates to pent-up demand

With published prices falling as they were in 2012 and 2013, the majority of prospective buyers will have delayed purchasing decisions until clear signs of a market bottom or recovery are evident. The resulting pent-up demand is already translating into higher sales volumes and will help to trigger the forthcoming recovery.

5.   Demographic boom in demand

A retirement in the sun has long been a cherished dream among Northern Europeans. This dream was one of the major driving factors behind the last Algarve property boom that rapidly lost momentum in the wake of the 2008 fiscal crisis.

Now, the post-war baby-boom generation is approaching ever closer to retirement. Far more numerous than their elders, this generation tends to bid up the prices of whatever commodity it collectively demands. The population pyramid for the EU-27 shows the distribution of the population by five-year age groups in 1991 and in 2011. The target market of 45 – 64 year olds was 26.4% larger in 2011 than it was in 1991.

As of 2011, there were 27.4% more people in the 60 to 64 age group than in the 65 to 69 age group. Each younger 5-year group is larger than the previous, until reaching the largest group, the 40 to 45 year olds, those born between 1966 to 1971. These demographics presage a healthy increase in demand for leisure and retirement real estate.

 6.   Retiree demand fuelled by non-habitual residency tax regime

Visitors from high tax regimes in Northern Europe, including Sweden and France, have recently been arriving in the Algarve in ever greater numbers to rent or to buy property, attracted by the so called Non-Habitual Residency tax regime under which many new residents, especially retirees, can enjoy very favourable tax treatment.

Read more.

 7.   Golden Visa demand

The introduction of the golden visa scheme in 2012 has already been responsible for more than €400m of Portuguese property sales. Attractions of the offer include the relatively low €500,000 investment threshold, an undemanding 7-day annual residency commitment and unfettered access to the entire Schengen area.

The volume of related property sales will continue to grow, as more and more affluent individuals and families from non-EU jurisdictions look to secure an escape route from potential political or economic uncertainty at home.

Read more.

 8.   Limited supply

In the early 1990’s, reacting to the undisciplined free-for-all that developed during the first Algarve real estate boom of the 1980’s, the Portuguese government introduced a comprehensive centralised planning regime. At the top are the rules (PROT) governing the development of each major territory. These then guide and control the evolution of the master plans (PDM) for each municipality.

Nature Parks were created, sweeping measures were introduced to protect coastlines, and official bodies were set up to protect lands designated as of special agricultural (RAN) or ecological (REN) value.

The second wave of development that gathered momentum in the late 1990’s was thus more measured and controlled than the first. As a result, when the downturn hit at the end of 2008, Portugal’s stock of unsold homes measured in terms of years of supply was far lower than Spain’s.  Its bank of undeveloped urban land is also relatively modest.

This limited supply will help to fuel the upcoming recovery.

9.   Underlying location benefits

For many, the excellent quality of life is reason in itself to relocate to the Algarve. Benefits include the sunny yet moderate weather, easy getting around, friendly and welcoming locals, wide use of English, established expat community, rich sporting and leisure opportunities, local gastronomy, reasonable cost of living, stable political and economic environment, and a good health service.

10.  Portugal’s economy recovering

The most severe phase of the property market downturn was triggered by the euro crisis of 2011. It was then that foreign investors lost confidence and banks stopped lending.

The austerity medicine dictated by the Troika and swallowed whole by the Portuguese government included structural reform of the labour market, reduced government expenditure and higher taxation. Domestic consumption has fallen but exports have grown and banks have juggled bad assets to improve their balance sheets. GDP is now growing again, the risk of bond default or euro exit has receded and Portugal has returned to the international credit markets.

Portugal is now an improving environment for inbound investment, particularly as emerging markets have lost their lustre and Russia’s annexation of Crimea has emphasised the relative stability of Western Europe.

March 2014

Obstacles to full implementation finally overcome

In 2009, a special tax regime was introduced for those taking up residency in Portugal. The benefits, which can be substantial, apply for a fixed ten year period, but are available only to so-called non-habitual residents (“NHRs”), namely those not previously resident for at least five years.

The prevailing culture in the Portuguese Finance Department is to tighten compliance and to close loopholes rather than to grant exemptions, so it is not surprising that a number of further administrative rulings were sought before the regime could be practically applied.

It was only in December 2012 that the Department issued the first NHR assessments for those with no foreign-sourced pension income. The remaining assessments followed at the end of March 2103 but, despite the long delay, these initial assessments were incorrect, as they still sought to tax other types of foreign-sourced passive income, even when exemption requirements were clearly met.

Appeals followed and corrected assessments were eventually issued at the end of 2013. The regime is now finally being fully and consistently applied.

The motivation behind the generous benefits on offer is to deliver a boost to the Portuguese economy by attracting Northern European retirees and high net worth individuals, as well as workers in high value-added occupations. It is also intended to encourage well-qualified, affluent expatriates to move back to Portugal.

Right from its inception, interest in the scheme from the Scandinavians has been strong, partly fuelled by the publicity given to it by PWC (see “Europe’s Best Kept Secret”) and other big accounting firms including KPMG.

More recently, the regime has captured the interest of the tax-fatigued French, who are visiting Portugal and buying property in ever greater numbers.

Qualifying as a non-habitual tax resident

To qualify, non-residents must first obtain a valid resident permit, then register as tax resident and only then apply for the NHR status.

Tax residence may be acquired by spending more than 183 days of the year in the Portuguese territory, whether consecutive or not. Tax residence may also be acquired if, on 31^st December of the year in question, the individual is staying in an abode with the demonstrable intention of holding and occupying it as a permanent residence. Evidence for this can include ownership or a long-term rental contract.

NHR status should be requested no later than 31^st March following the year in which residency was obtained.

NHR status will only be granted if the individual has not been a tax resident for the previous five years. In this regard, the applicant’s statement is sufficient. It is no longer necessary to produce foreign certificates of residence and tax payment history for this five year period.

So long as residency requirements continue to be met, NHR status is valid for ten years, after which the individual will be taxed according to the standard regime applicable to permanent residents.

Rules and benefits

The NHR regime includes two sets of rules, one applicable to foreign-sourced passive income, the other to active income whether derived from foreign or domestic sources.

Foreign-sourced passive income may include interest, dividends, capital gains, income from property and pensions.

The active income covered by the second set of rules refers to income derived from employment, personal services and royalties.

Foreign-sourced passive income is tax exempt so long as it may potentially be taxed in the source state under the rules of a tax treaty with Portugal, or under the OECD Model Tax Convention, and it is not considered to arise from a Portuguese source, nor from a source on the Portuguese tax haven blacklist.

Foreign-sourced active income is also exempt provided that it is actually taxed in the source state under the rules of a tax treaty with Portugal, etc.  Otherwise, if foreign-sourced active income is not taxed at source, then it will be treated in the same way as domestic-sourced active income.

If active income derives from one of the high value-added activities of a scientific, artistic or technical nature as listed in the Ministerial Order, then it is taxed at a flat rate of 20% and not at the progressive rates generally applicable.

The Ministerial Order defines a long list of high added-value workers, including artists and musicians, construction, medical, legal and accounting professionals, academics, researchers and IT staff.

The flat rate gets bumpy

The state “austerity” budgets for 2013 and 2014 have applied an “extraordinary” surtax of 3.5% on the taxable income of individuals. The surtax is applicable to all NHR income which is not exempt under the rules. It therefore increases the flat rate on income from high value-added activities from 20% to 23.5%. And it is difficult to say when this surtax might be reduced or eliminated.

For high-earning professionals, even 23.5% can appear attractive compared to top marginal rates of between 40% and 50% prevailing elsewhere in Europe. In Portugal itself, the top marginal “austerity” rate is currently 55.5% for income exceeding €250,000.

Factor in the weather and lifestyle benefits, and small firms with mobile, high-value workforces may be tempted to relocate.

Social security stays lumpy

But the attraction of the NHR regime diminishes when adding social security to the mix. Contributions total nearly 35%, with 11% paid by the employee and a whopping 23.75% by the employer.

Being self-employed doesn’t help, as contributions are still between 25.4% and 32% depending on the range of benefits, and, if you are paid mostly by one company, the company must make an additional 5% contribution.

Who can benefit

While the overall incentive package may not be enough to tempt firms to relocate their business to Portugal, it is certainly a very attractive package for those earning mostly passive, foreign-sourced income, whether in the form of pensions, dividends, rents or capital gains.

Ponte da Piedade, Lagos

Statistics published by the National Statistics Institute (INE) for tourist establishments in 2013 show that overnight stays by visitors from external markets grew by a robust 8% year-on-year, although those from within Portugal showed a slight reduction of 0.9%.

The increase in external visitors was particularly marked among those from France and the USA, and was in contrast to the fall in the numbers of domestic visitors, reflecting the general fall in domestic consumption brought about by successive euro crisis austerity budgets.

The rise in the numbers of French visitors can also be attributed to euro-related economic pressures, as tax increases in France, coupled with the low tax regime now on offer to those taking up “non-habitual residency”, have combined to stimulate growing interest in Portugal as a retirement destination.

Revenue was also up 5.4 percent on last year’s total, climbing above €1.9 billion.

Tourism contributes to positive trade balance and job creation

Speaking at a press conference, Portugal’s Economy Minister announced that 2013 was the best year ever for tourism, reinforcing “trust and hope” in the country’s ability to be fiscally autonomous.

The Minister Pires de Lima commented: “In 2013 tourism established itself as the sector that most contributed towards the positive outcome of our balance of trade. This balance came in at around 104.3 percent and was positive for the first time in decades”.

In Pires de Lima’s opinion the results are “historic” as they come at an economic moment that is “particularly demanding and very challenging.” He mentioned that, of the 128,300 jobs created between March and December 2013 in the Portuguese economy, about 20% were tourism-related.

Potential for further expansion

The demand for overnight stays from domestic visitors has fallen by a total of more than 10% in the past 3 years. Although still in decline, the rate of decline is now much smaller than in previous years, and, with the domestic market accounting for nearly 30% of total overnight stays, a wider recovery in the Portuguese economy would have a big positive effect on overall tourism numbers.

Visitors from Spain grew marginally year-on-year but showed a dramatic rise of 18.5% in December. This is evidence of Spanish consumer resilience in the face of ongoing high unemployment and falling property prices. Economic recovery in Spain would also be very positive for Portuguese tourism.

The Algarve moves ahead but underperforms Portugal as a whole

The number of Algarve guests in 2013 grew by 3.6% tear-on-year to 3.15 million, with a record-breaking €609 million generated in overall revenue. Faro International Airport saw some six million passengers pass through its doors, while the number of rounds of golf played on the region’s greens  rose above one million for the first time since 2009.

When looking at the figures region by region, the Algarve, although by far the most popular region with 35.5% of overnight stays, underperformed relative to the average, with a total growth of 3.5% (av. 5.2%) made up of an increase of 5.5% (av. 8%) in non-residents, offset by a decline of 2.9% in residents (av. -0.9%).

Some of the factors driving overall growth – French interest in the country as a retirement destination, US economic growth feeding through to greater outbound tourism – have played to the strengths of regions other than the Algarve.

The Azores, Madeira, the North and Lisbon all performed better overall, with only the Central and Alentejo regions performing worse. In terms of growing popularity among non-residents, the Azores stood out with a year-on-year increase of 24.6%.