Money Markets talks to Dr. Alexandra Pereira
Portuguese Real Estate
Investment - The legal Process
Under halcyon skies and amidst the plush opulence of the Algarve Jonathan Calens talks property matters with Dr Alexandra Pereira.
Q. Where in Portugal is your practice based and how long have you been established for?
A. I first started practicing law in 1985 as an independent. Initially, I opened an office in Lisbon, offering a variety of services to various clients, gradually increasing the sc6pe of my operation, and making inherent changes to the business. After practicing in Lisbon for some five and a half years, I then moved the practice to the Algarve in 1991. Nowadays I cover all areas relevant to property matters, including the taxation element.
Q. Do you focus exclusively on me Portuguese market and are me majority of your c1ients institutional or private?
A. The short answer is No. We have clients all over the world, but given me fact that the Algarve is a high demand location,
"Our client portfolio is made up of both institutional and private investors, whose needs vary greatly, from those simply requiring ownership of an overseas property, to those looking for development opportunities"
we place a great deal of emphasis on this market. A large number of foreign investors come here to buy property, and as it happens, the majority of our clients are British. Our client portfolio is made up of both institutional and private investors, whose needs vary greatly, from those simply requiring ownership of an overseas property, to those looking for development opportunities.
Q. For a small country the regions of Portugal are immensely varied, from rural Minho and Trás-OsMontes in the North, to the sandy beaches of the Algarve. Generally, where do most of your clients tend to invest?
A. Generally speaking, the Algarve is still thee preferred investment location for most of our investors; however, there is an increase of developments and interest in the Eastern Algarve. Of late some of our c1ients have been looking to the North, and in particular an area called thee Silver Coast, which is located between Lisbon and Oporto. Having said this, the vast majority of my c1ients still choose the Algarve.
The buying process
Q. Property buyers should be aware of the law of subrogation, whereby property debts, including mortgages, local taxes and community charges, remain with a property and are inherited by the buyer. What steps can a foreign investor take to ensure that they are protected against this?
A. The most important thing is to ensure that the property has a clean title. It is therefore necessary to make sure that the property is registered in the vendor's name, and that no charges, fiscal debts or other encumbrances exist. As an example, when purchasing a property in a condominium, there may well be service charges pending or taxes outstanding. In cases like this we would insert a clause into the contract, stating that after completion the seller remains responsible for all debts accrued whilst he was the property owner.
Q. Due to the high demand for new Portuguese properties, many investors tend to buy "off plan" from developers:
(a): Does the legal process differ when buying a new property?
(b): What do you believe to be me key benefits attached to buying a property directly from the developer?
"As property prices continue to escalate, more and more people are buying off-plan, thus securing a property well below its ultimate market value"
A. As property prices continue to escalate, more and more people are buying off-plan, thus securing a property well below its ultimate market value. However, one must appreciate that at this stage construction may not have commenced; the developer might only have a building license.
When dealing with important issues, such as planning permission, local searches are vital. It is also necessary to ensure that the contractor makes available the project's description, specifications pertaining to completion, stage payments on the progression of construction, and guarantees. These should all be attached to the contract.
Documentation. Taxes and Costs ...
Q. From a taxation standpoint, what do foreign investors need to know when buying and selling property in Portugal?
A. Of course, a prospective purchaser should be aware of the tax implications involved. For this reason, it is advisable to involve a lawyer and or tax adviser from the outset. There are various taxes which are levied on the purchase, ownership and sale of real estate. These include: IMT (Real Estate Transfer Tax), up to a maximum of 6.5%, subject to price and type of property, Stamp duty at 0.8% and IMI (Municipal Property Tax), which varies depending on the property and its location. Capital Gains Tax of 25% for non-residents, based on me difference between purchase price, adjusted by currency devaluation rate, and sales price, is applicable when selling property. Capital Gains Tax may also be applicable to residents but at different rates.
Commercial and industrial property
Q. (a): Aside from a utilization license, and a certified insertion at the Land Conservatory, what other documentation must a buyer investing in a commercial or industrial property obtain?
Q. (b): Is Additional documentation required when purchasing a rural property?
A. These questions cannot be answered in isolation, as cases differ widely. Generally speaking, however, if buyer and seller agree terms, an agreement of sale is prepared. The buyer is men shown all of the relevant information pertaining to me building, architect designs, alterations if any, official certificates and so on and so forth. An application is made for a license of use, i.e. a legal operation license, as otherwise the property is deemed to have 'no use'. When acquiring rural land, more commonly known as rustic land, an approval document from the city council is required if the property is to be purchased in more than one name. It is worth noting that whereas IMT tax is levied at scale rates for urban property, rustic land attracts a fixed rate of only 5%.
Q. What impact has the new lease law had on Portugal's commercial property sector?
A. It is too soon to comment at length about the new lease law. This law carne into force on the 28m of June and other connected laws were published on the 8th of August 2006. Having said that, the new law allows for an increase of the rents, up to a maximum of 4%, payable on commercial contracts celebrated before the 30th September 1995. This increase of rents in older contracts may eventually lead to me termination of said contracts. The new law gives greater freedom to the parties to negotiate me terms of the contract, including the celebration of short term contracts. This can only benefit the commercial property sector. It is however essential mat the contract be carefully prepared to safeguard both parties interest.
Q. In terms of rent, under the new law, landlords are permitted to charge up to 4% of the property's estimated value. The government believes that you should now be able to recoup your investment within 20 years. Do you believe that this is feasible?
A. The new law establishes the method for increasing rents of residential property up to 4% of the prop property's value, but this valuation cannot be an estimate. The valuation must be carried out by the Tax Office and must have taken place within 3 years of the proposed rental increase and is subject to the status and maintenance of the building. As the annual taxes on property (1M!) are based on the valuation of properties, and old properties are in general those with lower rents and poorer maintenance, the question is raised is it wise to pursue an increase in the rent? Only time will tell how effective this law will be ...
Q. What does the future hold for the Alexandra Pereira Law Office?
A. My expectations for the future are big, very big indeed! As the property market experiences a huge resurgence, I anticipate a number of large projects coming to fruition. I am looking beyond the local environs to new markets in other countries, and I have now opened offices in Cape Verde and Brazil.
With the bulk of my clientele coming from Britain, I am also contemplating opening offices in London and Dublin. A natural progression would be to expand into other Portuguese speaking countries like Mozambique, for example, where I feel we can make a significant contribution.
I am excited about the future, with its vista of new projects and challenges.
Dr. Alexandra Pereira has been inscribed with the Portuguese Order of Lawyers since 1985. The Alexandra Pereira Law Office has been established in the Algarve since 1991. The Head Office is located in Almancil. a town which serves as the service centre for the renowned developments of Quinta do Lago and Vale do Lobo