Governments housing package ‘mais habitação’ part 2 of 3: measures with most impact on the rental market

Governments housing package ‘mais habitação’ part 1 of 3: measures with most impact on Golden Visa, short-term rental and licensing

• Golden Visa will not be granted for real estate investment anymore
• Further restrictions on use of residential units as AirBnB and other short-term rental
• Simplification of the licensing process
• Increase residential space through easing conversion of commercial space
• The state will make some of the land it owns, and is not used, available for the development of affordable housing

Governments housing package ‘mais habitação’ part 2 of 3: measures with most impact on the rental market

• Rent for new contracts is limited to 2% above the last rent
• Change of taxation of rents
• State will act as contract party in rental agreement whilst providing the space to low-income individuals
• State will rent residential units in the free market to sublease them at lower rent to low-income households
• State will subsidise rents for households in need
• State reduces or exempts from various tax positions when a unit is let at affordable rent

Governments housing package ‘mais habitação’ part 3 of 3: measures with most impact on mortgages and a note on key interest rates and mortgage subsidies

• No capital gains tax when house sale proceedings are used to pay off mortgage
• All banks have to offer fixed rates on home mortgages
• State will subsidise interest rate payments for households in need
• A note on key interest rates and mortgage subsidies
• Further reading on the topic in English

Measure: Rent for new contracts is limited to 2% above the last rent

What does it entail?

Residential units which have been subject to a rental agreement within the past 10 years can not have a new rent more than 2% above the last one or the rent increase that could have been exercised during the last lease term. If there were rent update coefficients unapplied over up to three years, these can be added.

What does it mean for you as an investor?

Whereas property investments are usually a good protection against inflation, this is now a bit less so. In addition, there is an increased likelihood that this measure will be applied more often or even permanently in the future. 

Ironically, this measure bears the potential to affect the provision of housing negatively in the long-term. As it reduces the attraction of buy-to-let investments, it reduces the construction and refurbishment of apartments for this purpose and the overall availability of housing. 

Whereas investors will see their income from lettings increase slower due to this measure, the potential extension of it may increase negative long-term pressure on supply and, hence, support property values (stable or increased demand meeting stable or decreased supply).

Measure: Change of taxation of rents

What does it entail?

Hoping to encourage that owners put houses on the market, which have previously not been for let, the tax on rental income (IRS) was reduced to:

• 25% for contracts wit a term <5 years
• 15% for contracts with a term of 5 to 10 years
• 10% for contracts with a term of 10 to 20 years
• 5% for contracts with a term of >20 years

What does it mean for you as an investor?

It needs to be seen how much of an incentive this measure will be. 

On one hand the amount of vacant apartments is significant. 

On the other hand, these are not the vacancies that would be eliminated by a small percentage of tax savings.

An investor should go through their real estate portfolio and planned acquisitions to understand the impact of this measure. It will often turn out to be small relevance, but when seen in combination with the entire housing package may impact a decision here and there. 

Also, make sure you always have a good and up to date tax advisor.

Measure: State will act as contract party in rental agreement whilst providing the space to low-income individuals

What does it entail?

A core aim of the housing package is to ease access to housing for households with low or no income and those with a high rent to earnings ratio respectively. 

This measure will allow that the state can act as for the tenant in case the latter defaults and there is a reason that should be mitigated through public funds. If pursued this measure would apply after three months of defaulting and a respective filing of an eviction request. 

What does it mean for you as an investor?

This will only affect a landlord in case of a tenant in default. In the worst case the state does not exercise the right to enter the process, so a landlord would just proceed with the eviction as initiated. In the best case a tenant who has been unable to pay can stay, the eviction (and future costs) become unnecessary and your contract party is the most reliable you can possibly have (the state). 

Measure: State will rent residential units in the free market to sublease them at lower rent to low-income households

What does it entail?

In a similar way in which some municipalities (e.g. Lisbon) already rent apartments in the private market to provide them to families as affordable housing, the state set up a similar scheme. 

Rent will be directly paid from the state to the landlord, so there is no risk of tenant default and the tenants rent burden can be kept below or at 35% of the household income. As of now, the maximum period for this support is limited to 5 years duration.

Further, the measure includes the possibility for the state to purchase housing units for the same purpose and exempts those transactions from capital gains tax (IRS). This is applicable to sales to municipalities as well. 

What does it mean for you as an investor?

This measure may be relevant to you when: 

• You are going to rent out an apartment which would suit the requirements of the scheme. You would receive a rental party much safer than any individual.
• You are going to sell and the apartment would fit the requirements. With this measure the state or the municipality become possible buyers and you might be able to safe on capital gains tax (IRS). 

Measure: State will subsidise rents for households in need

What does it entail?

Applicable to households which spend more than 35% of their income in rent for contracts dating 21^st December 2022 or before and, at the same time, are in a certain tax bracket, the state will monthly subsidy of up to 200 Euros.

What does it mean for you as an investor?

This will have a rather marginal effect on investors who have tenants who qualify for the above, because it simply eases of facilitates the tenants’ rent payments. 

Measure: State reduces or exempts from various tax positions when a unit is let at affordable rent

What does it entail?

Basically, this measure aims at:

• Reducing the tax burden for landlords hoping that they lower their asking rents to the extent that they become affordable.
• Reducing the tax burden for landlords hoping it makes it financially more viable to construct or refurbish for affordable housing

Both of the above will be done through reducing property transfer tax (IMT), income tax (IRS) and municipal property tax (IMI) and value added tax (VAT) for construction and refurbishment works. 

Further, this measure includes that:

• Municipalities may fund refurbishments of units which are currently marketable and allocate them to affordable housing.
• Public authorities can force the owner to lease a unit which is proven top be unlet and unoccupied. 

What does it mean for you as an investor?

This will depend on the costs and income structure of the residential units you own or plan to acquire. 

To benefit from the tax deductions (some of which are applied temporarily) the amount you save in total would have to be less than the difference between the market rent and the affordable rent. Research the respective parameters or consult your real estate consultant and tax advisor to find out whether that would be the case. 

However, forced refurbishment and renting will appear as a threat to many owners. If you own a vacant unit and are not running any efforts to bring it to the market in some way, it is time to act. Otherwise, you run risk that the state takes this decision from you. 

Read more on the housing package in the other two parts of this post: 

Governments housing package ‘mais habitação’ part 1 of 3: measures with most impact on Golden Visa, short-term rental and licensing

• Golden Visa will not be granted for real estate investment anymore
• Further restrictions on use of residential units as AirBnB and other short-term rental
• Simplification of the licensing process
• Increase residential space through easing conversion of commercial space
• The state will make some of the land it owns, and is not used, available for the development of affordable housing

Governments housing package ‘mais habitação’ part 3 of 3: measures with most impact on mortgages and a note on key interest rates and mortgage subsidies

• No capital gains tax when house sale proceedings are used to pay off mortgage
• All banks have to offer fixed rates on home mortgages
• State will subsidise interest rate payments for households in need
• A note on key interest rates and mortgage subsidies
• Further reading on the topic in English