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Investing in holiday rentals in Portugal for tourists? A profitable business opportunity

2 de October, 2018

Investing in holiday rentals in Portugal for tourists? A profitable business opportunity

Reading: 9 min

The rental per season of property for temporary accommodation of tourists, which in Portugal is called “Local Accommodation – AL”, has become increasingly an alternative for investors, not only for nationals but also for foreigners.

With the tourism boom that has occurred in recent years in the country, associated with the creation and popularization of the use of online platforms for home reservations (e.g. Airbnb, Booking, Homeaway), and in a scenario of security and low crime rate, the ideal conditions for the development of this niche market in Portugal were created.

Official data show that Local Accommodation (rental per season of properties for tourists) has more than quadrupled in the last three years in Portugal, with the number of units having increased from 26,151 in 2016 to 51,014 in 2017, which represents an increase of 85%. Currently this type of rental already represents a third of the guests and overnight stays in the country, and the outlook continues to be one of strong growth in the coming years.

Vacation rental in Portugal: would you also like to invest in Local Accommodation in Portugal?

In this article we will help you to better understand the context of the country for the development of this business, the prospects of financial return, as well as point out the procedures, requirements and legal procedures involved in making an investment in this segment.

Investment and Expected Return Scenario

Portugal underwent a transformation of its economy with the strong growth of tourism based on five major strengths: (i) low costs; (ii) security; (iii) historical heritage; (iv) gastronomy and (v) diversified offer – beach, countryside and city.

With revenues growing 70% since 2011, tourism already makes up 10% of Portuguese GDP and a major source of revenue for real estate business.

The average occupancy of the Local Accommodation in the main tourism centres is 78% with average daily rates of 127 euros for Lisbon and 105 euros for Porto.

The potential return on investment in Local Housing, however, depends on the relationship between the expected results and the investment made. There are four major factors that will determine this profitability:

  • Location
  • Management
  • Taxation
  • Initial condition of the property

Properties located in Porto, for example, have an expected return about 40% higher than Lisbon, because it is much cheaper per square meter. The management of a property by a third party costs on average 20% of revenues. Those who save on this expense and manage the property themselves guarantee a return about 58% higher.

In relation to taxation, real estate located within urban regeneration areas (ARUs) has an income tax rate about 40% lower. Finally, investing in a property in need of renovation will reduce the purchase price by approximately 20% compared to a new property.

Therefore, depending on the matrix of decisions made, a Local Lodging can have a net return on investment between 2% and 9% per year, which can be very attractive when compared to the returns of residential properties in Brazil – on average 4% per year – and also in relation to financial investments in euros, which are in the range of 0.5% to 2% per year.

Requirements, Limitations and Legal Procedures

Brief history

In Portugal, the legal provision for “Local Accommodation” appeared in 2008, initially with the objective of allowing the provision of temporary accommodation services in establishments that did not meet the legal requirements for tourism enterprises.

However, due to the recognition that this new reality was a consistent and global phenomenon and, at the same time, relevant from the tourism and tax point of view for the country, in 2014 the figure of Local Accommodation was regulated in its own diploma, moving from a residual category to a category autonomous from tourism enterprises in general.

Since then, two amendments to the legal regime of Local Accommodation have been published, which aimed to adjust some aspects of this figure to the dynamic reality of the country, as well as to reconcile the interests of the parties involved in this phenomenon, and the most recent amendment will come into force as of November 2018.

In this context, below we will present the main aspects of the Legal Regime of Local Accommodation of interest to investors, also pointing out the innovations that will come into force very soon.

Definition of typology

Local accommodation establishments correspond to those that provide temporary accommodation services to tourists, for remuneration. With the legal changes that will come into force from November 2018 there will be four types of LG:

(1)housing: where the accommodation unit consists of a detached, single-family building. For example, it occurs when the owner of the building makes all apartments available to the LG.

2.Apartment: the accommodation unit of which consists of an autonomous fraction of a building or part of an urban building that can be used independently. For example, it occurs when the owner of a fraction/apartment of a building makes it available to the LG.

3.Accommodation Establishments: whose accommodation units consist of rooms, integrated in an autonomous fraction of a building, in an urban building or in a part of an urban building susceptible of independent use. This is the case of a Hostel, where the predominant accommodation unit is the dormitory.

4. Rooms: In this typology, LA is operated at the residence of the lessor, which corresponds to his tax domicile, the accommodation unit being the fourth and only a maximum of three units being possible in this case. This modality is an innovation compared to the regime in force until now.

Activity Record

In order for the investor to be able to start exploring the activity of the LG, it is necessary to proceed with its registration, following the following steps:

1. Opening of Activity (a kind of registration) with the Tax and Customs Authority of Portugal (equivalent to the Federal Revenue of Brazil).

2. Previous Communication (a kind of self-licensing) with the competent Municipality. The Prior Notice is automatically sent to the Turismo de Portugal and the Registro Nacional do Alojamento Local (RNAL).

The aforementioned Prior Notice must be accompanied by the documents legally required for the purpose, including: the authorisation for valid use of the property, the investor’s identification (passport, tax identification number and address), the capacity of the establishment (rooms, beds, etc.) and the intended date of opening to the public.

Within 30 days of the Prior Notice, the competent Municipal Council must carry out an on-site inspection to verify compliance with the legally due requirements. However, it is not necessary for the investor to wait for the inspection to open its space to the public, being able to do so only with the possession of proof of registration of the activity.

Identification and publicity obligations

The establishments concerned can only be identified as Local Accommodation establishments.

Only “Accommodation Establishments” that meet the requirements of the law may use the Hostel name in their name, advertising, commercial documentation and merchandising. In addition, “Accommodation Establishments” and “Rooms” may use the commercial designation of Bed & Breakfast or Guest House.

Any advertising, commercial documentation and merchandising of the establishment must indicate the name, logo and registration number. The periods of operation of the establishment shall be freely fixed, but shall be made public.

In addition, establishments must have a Complaints Book, as well as an Information Book on the operation of the establishment and its internal rules of use, in several languages.

Responsibilities and compulsory insurance

With the legal changes that will come into force in November 2018, the owner of the farm will be jointly and severally liable with the guests for the damage caused by them in the building in which the Local Accommodation establishment is installed.

Therefore, the operator of the activity must have a multi-risk civil liability insurance covering in particular fire risks and damage to property and personal property caused to both guests and third parties.

The lack of valid insurance will lead to the cancellation of the registration of the Local Accommodation. However, for LG units that are already in operation, this obligation will only be payable within 2 years.

Containment Areas

So far, there is no limitation on the location of LG units, whatever their modality.

However, in order to preserve the social reality of neighbourhoods and places, mainly due to an increase in the gentrification of urban centres in large cities, from November 2018 Municipalities will be able to create “containment areas” where quotas can be set taking into account the percentage limits in proportion to the properties available for housing. These “containment areas” should be reviewed at least every two years.

In this regard, it is important to note that these limitations do not apply to establishments that have already started their LA activities. However, in order to avoid a race to open new local lodgings before an eventual ban, municipalities may “suspend, for a maximum of one year, the authorization of new registrations in specifically delimited areas,” until the municipal regulations defining the containment areas come into force.

Neighbourhood prerogatives

This is one of the most important novelties of the legal regime that will come into force in November 2018 and that put an end to the public discussion on the subject, because until now, the condominium owners of the building where the Local Housing activity was installed could not prohibit its operation.

After this issue was taken to several Courts by condominium owners who wanted to refuse the operation of Local Accommodation in their building, the legislator clarified and defined the rights of the remaining condominium owners of the building, who may, from November 2018, request the cancellation of the activity whenever it jeopardizes the normal functioning of the building / condominium.

The request for cancellation of the Local Accommodation activity must be made to the competent City Hall. For this purpose, it will be necessary to gather the agreement of more than half of the permilage of the building and express the opposition to the exercise of the activity of Local Accommodation.

This decision must be substantiated and may result from the repeated and proven practice of acts that disturb the normal use of the building, as well as cause discomfort and affect the rest of the condominium owners. Therefore, it will be the City Council that decides on the request of cancellation, hearing the parties involved in advance.

Another novelty is that the condominium may fix the payment, for the Local Accommodation fractions, of an additional contribution corresponding to the expenses arising from the increased use of the common parts, with a limit of 30 % of the annual value of the respective quota.

However, we stress that these new prerogatives will not immediately apply to LG units that are already in operation, but will only become effective in relation to them within a period of two years.

Penalties for non-compliance

Failure to comply with legal rules can lead to fines or even to the closure of Local Housing units, for example, for lack of the necessary registration or for violation of the maximum capacity of establishments.

From November 2018, the amounts of the fines for this purpose will be increased, and in the most serious cases the amounts may be set from €2,500.00 to €4,000.00 for individuals and from €25,000.00 to €40,000.00 for legal/legal persons.

Final Considerations

Considering the expected net rates of return on investment, the investment in Local Accommodation is quite attractive when compared to other similar investments in Portugal and even in Brazil.

Although the most recent legal changes have limited some aspects related to the exercise of property rights (prerogatives of the neighbourhood and containment areas), we believe that the attractiveness of the segment will be maintained.

This is a profitable business opportunity in Portugal, available to both domestic and foreign investors, and it is often also an excellent option associated with real estate investment under the Golden Visa (Residence Permit for Investors).

Learn also how to finance real estate in Portugal.

Article published on the Euro Tips website: https://www.eurodicas.com.br/aluguel-por-temporada-em-portugal/

Author: Roberta Fraser
Citizenship & Immigration

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