The year is certainly starting with an element of uncertainty however local players remain bullish and firmly of the view that rents will increase which is to be expected during periods of high-interest rates.

Regarding sales, while the volume of transactions will retract, the same may not be the case for rates per square meter, and—as always—there will be segments of the real estate market that will continue to see price hikes such as the prime luxury market. This was evident in 2022, where both JLL and Sotheby’s noted record-breaking years, and is echoed in the latest statistics from INE for the final trimester of 2022 with an average increase of 8% registered despite fears of a global retraction.

So, although global pressures exist and cannot be ignored, for the time being, the Portuguese real estate market is standing firm due to a privileged geographical position and the fact that what Portugal has to offer is in high demand through good and bad times. Safety, affordability, lifestyle, climate, and stability cannot be undervalued and keep a global spotlight on Portugal.

The government is well aware of the country’s unique positioning and reputation for being a premier jurisdiction to work and play. Unsurprisingly, government initiatives to encourage immigration such as the D7, Digital Nomad and Golden Visa will continue to draw an international crowd to Portugal. The Golden Visa program is well documented and is indeed often over-credited with being a fundamental driver of the real estate market. However, the truth is that D7 and Digital Nomad Visas have a far greater impact. This has been evident with fiscal incentives and a general low or no inheritance, wealth, or donations tax rules, which has encouraged a very significant number of baby boomers and other entrepreneurs to call Portugal their home in recent years. Adding all this to the fact that the national housing stock dropped 19%—mainly due to licensing delays—when compared to the same time last year, while demand moved in the opposite direction. All these factors contribute to the high likelihood that prices will continue to rise, particularly in the prime residential sector.

While prime real estate is likely to increase in value, middle-class housing however is naturally expected to experience some stagnation as buyers in this market segment predominantly require financing. However, developers will struggle to lower prices as construction and finance costs have increased significantly, and hence they are likely to hold their positions.

In the last year, some residential units recorded rent prices up to 30% higher than their initial asking price as the pool of potential tenants outweighed the available supply of rental properties. This phenomenon is expected to continue well into 2023 as approximately 93% of mortgages in the country are at variable rates. This is thus likely going to force many households into the rental market as rates continue to rise.

2023 may also be the year that areas such as Ericeira and Setúbal firmly cement their market positions as they both offer proximity to Lisbon, but with more affordability and they combine city living with beach and countryside access, which has become increasingly important these days. Essentially, these areas offer that balance of everyday life that Portugal is increasingly well known for.

With the above in mind, we expect sellers to continue to hold the upper hand in 2023 while landlords may experience their best year yet.

by Bernardo Campelo, Real Estate Investment Manager at EQTY Capital