How can you benefit from the end of cycle?

Market summary

  • The price/sqm traded fell by 10.7% in the 2nd quarter of 2020 and the volume of transactions fell by 48%;
  • The biggest drops were registered in Campolide (-39.2%), Santa Maria Maior (-25.9%) and Alcântara (-23.9%) and the biggest increases were in Areeiro (16.7%), Belém (14.6%) and Beato (11.2% );
  • In July, the downward trend in price continues with the volume of transactions recovering significantly, but even so, between 15 and 20% lower than in 2019;
  • The take-up rate, which had been falling since 2016 (it was 69.7% in the 1st quarter), dropped to 31.4%, which means that the market only absorbs 1 in 3 of the properties that are for sale;
  • There is a tendency to flee towards the periphery, where prices are lower;
  • The price/sqm of rents fell by 7.8%, and the volume of transactions fell by 35.4%.

It is premature to draw conclusions at this stage of the market, because the sharp drop in transactions in the 2nd quarter was due to a period of confinement in which the country practically stopped for almost 2 months. The first signs of June and July point to a gradual recovery, but the transaction volume remains 15-20% lower when compared to 2019. The traded price continues to be pressured downwards.

When we look at the market performance charts, it seems evident that there is a correction trend. When we add the other economic indicators together, there are very clear signs of the end of the cycle, which was inevitable with or without COVID-19.

In 2019, foreigners represented 35% of buyers in central Lisbon. The good news is that the interest of foreign buyers remains, both at the level of investors and for a living. There are many foreigners who look to Lisbon as a safer and more attractive city to live in (for example, there are many Americans moving to Lisbon). It is, however, an informed buyer who is not willing to pay inflated prices, as has happened in the recent past.

The rental market has been very pressured by properties that came from Local Accommodation and that are making contracts from 6 months to 1 year, with prices much lower than those that were usually practiced in the market. In Alfama 6 months ago a 1BR was rented for €1,000. Now it is rented for €650 and sometimes less, and the market is flooded. This movement takes place not only in Alfama, but throughout the city.

What is the best strategy for this market phase?

Sell now, save the money, lease and buy in a while.

There are already many owners who are taking advantage of the end of the cycle to sell now, making a good financial fit. Many bought homes during the crisis or at the beginning of the century. They can sell for twice the price they bought. Seems to make sense, don’t you think?

As rents are also falling and there is a lot of supply, they choose to rent a house in the near future and wait for the market to correct, so that later they can buy lower.

Do not forget that you have 3 years to reinvest the capital in another home to avoid paying capital gains. As you will have extra capital, you can take the opportunity to prepay 1 year of your lease and get an additional discount.

Don’t think about selling to get a good deal, putting your house above the market price. When the market is falling, the so-called “overpricing” is the worst possible strategy, because with the price falling, the more time passes, the cheaper you end up selling. You’ll just be helping others sell their houses, and yours will continue to drag on the market. If that’s your intention, keep quiet and don’t even try to sell.

Investment opportunities in the periphery

The central locations of Almada and Amadora continue to be interesting from a rental investment perspective, as long as there are businesses with good returns. These are cities where there has been a lot of investment in urban rehabilitation and public spaces, they have good access to Lisbon, and rental prices are lower than those of Lisbon, which are very attractive to young people.

I recommend that you look for properties with minimum returns of 6 to 7%, or price/sqm around €1750/sqm.

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