Villas for sale in the Algarve Portugal - Bad Investment, Bad Deal - A Warning

Tired of Portuguese villa real estate salespeople telling you what a great investment the Algarve is? Yes, me too, and what is more I believe Algarve (Portugal) villas are potentially a very bad property investment deal, in spite of what the real estate agents / realtors say!

As an economist for a leading investment bank with all the recent ho-ha about sub-prime lending and unstable housing market / real estate prices, having hopefully as much sense as money, having been looking for both a holiday villa, come investment and rental income opportunity, come eventual retirement home, I naturally looked at the Algarve in Portugal. Oh sure, when you come and bask in the warmth and sunshine of the Algarve, hearing so many people speaking English so as to make learning Portuguese unnecessary, or so it initially seems, looking at all the sales literature from all those respectable sounding realtors / estate agents talking about massive investment returns (hogwash), finding a range of restaurants and glowing, very questionable reports about schools, hospitals and shopping, it is easy to get sucked in. But having been to the Algarve, getting past that, then seeing what a house of cards the place really is, I say “Algarve Villas? No thanks Portugal!”

If you ask me where is the best area to invest / buy a villa on the Iberian Peninsula, I would have to say Galicia in Spain (see Galicia Property) or the Costa Verde in Portugal; the later I would strongly recommend being as close as possible to a Spanish border crossing point as you can read why on other pages of my do not buy / invest in Algarve Portugal Villas blog!

Notes:

1) The Algarve is actually made up of the following towns and villages; Alcalar, Alcantarilha, Algoz, Alte, Alvor, Armação de Pêra, Boliqueime, Caldas de Monchique, Carvoeiro, Ferragudo, Lagos, Monchique, Pêra, Porches, Portimão, Salir, São Bartolomeu de Messines, Silves and Vila Senhora da Rocha.

2) “Villas” - Exclusive country properties; particularly applies to the suburban summer residences of the ancient Romans and their later imitators.

3) Portugal is a republic and a member of the EU with Lisbon / Lisboa the capital.

Algarve Portugal Weather / Climate - all change

Algarve, Portugal, 2071 - climate change forecast.

The Algarve is the hogwash capital for claims about having an ideal climate and perfect weather; the truth is there for everyone to research, especially regarding climate change. The fact is, even the Portuguese scientists and the EU officially concede The Algarve is going to be more like the Sahara Desert in 50+ years time. Oh, you probably will not be alive in 50 years time you say! But your children and / or grandchildren will, we are talking investment here and the Algarve turning into a very hot, very large sand pit is a painfully gradual event which is taking place right now.

Below is an extended forecast map from the leading EU research center for climate change, the Centre International de Recherche sur l'Environnement et le Développement and Ecole Nationale de la Météorologie, Météo-France. This map shows where various cities are predicted to be climate wise in 2071, basically everybody is going to be a little warmer. The average temperature increase by 2050 for Portugal is forecast by the EU to be 6 to 7º Celsius (See Portuguese Report) with around 50% to 80% less rainfall for the Algarve (see: EU water scarcity predictions for Portugal). Of course there will be peaks and troughs even in this nightmare scenario and probably do not need to remind many people that like that 15,000 people died during the French heat wave of 2003.

Quite a scary fact is that the Algarve could well have a climate similar to Ouarzazate (Ouarzazate weather) in the Sahara / Morocco by 2071; not quite the green, warm paradise portrayed by Algarve villa salespeople huh?!

According to a study published in the June 15th 2007 issue of Geophysical Research Letters, The Mediterranean area (including the Algarve) is one of the areas most susceptible to climate change and is expected to experience more warming and drying than other parts of the world. This report continues “The number of days where the heat index reaches dangerous levels would rise by an average of 40 more days a year” and study co-author Jeremy Pal is quoted as saying “You wouldn't want to be here in the summer”.

The EU’s own predictions (authored by Portuguese scientists) in their climate change technical report of 2007 estimate the mean average flow of Portugal’s rivers in the Algarve, which directly correlate to rainfall, predict a reduction of 50%. Fifty percent less river water / rainfall is not just a fire hazard (memories of Portugal 2006) and hosepipe ban, it also equates to a severe health risk as the water table will become increasingly contaminated from harmful bacteria and chemicals.

The same (EU) report however forecasts river flow / rainfall will at worst drop by only 10% on the Iberian Peninsula north of the River Douro / Porto. It is an irony that along with the Météo-France temperature forecast, anyone buying a property in Galicia (Spain) or the Costa Verde (Portugal) will enjoy present day Algarve weather conditions around 2050! Be warned, the Algarve already has a water problem; it seems it is only going to get worse, much worse.

Algarve Portugal Tsunami Risk

Despite the commonly held belief that tsunamis do not exist in the Atlantic, they do and the south of Portugal (Algarve) is the area most at risk. Although most fault lines in the Atlantic Ocean are too deep to cause a tsunami (tsunami formation requires comparatively shallow offshore water), there is a fault line just south of Portugal called the “Gorringe Bank” which has created large, deadly tsunamis at least twice before, on the 26th January 1531 and 1st November 1755. Yes, based on the time difference between these two tsunamis, Portugal is overdue its next one. In fact the Portuguese authorities take the risk so seriously they are now installing seafloor pressure gauges there in the hope of getting some advance warning.

The last Portuguese tsunami of 1755 is actually better known as the Lisbon Earthquake, which destroyed large sections of the city (as were many of the buildings in the Algarve). But what is less well known is the resulting tsunami which hit Lisbon Harbour and the Algarve 20 minutes after the quake.It is not just submarine earthquakes which threaten coastal areas of Portugal and Spain with tsunamis. There is a pronounced risk of a massive landslide occurring on the island of La Palma (the Canary Islands) which could send waves out as high as 100 meters high. OK, these particularly massive waves would afflict the Canaries and African Coast, but the Algarve would also get some pretty big surf that day (see: Atlantic Canary Tsunami Threat). The fact is, if you like the Portuguese / Spanish beach life and want a watertight property investment, you are probably better off looking for a villa which overlooks a “Praia Fluvial” (river beach) inland a little!

Expat (Expatriate) Cost Of Living / Preschools / Work / Hospitals / Healthcare

Want or expect to earn a living in Southern Portugal as a resident "expat"? Sold on the idea of the Algarve because of low prices / cost of living? You might change your mind if you check the Algarve Portugal expat forums or if and when you come to buy a car in Portugal (as it has one of the highest domestic car sales tax systems in the EU). Many potential expats still believe and are counting on tax dodges that previously helped to make Portugal artificially cheaper than it should be is not going to last much longer (see my crime page for why).

Work / Making a living on the Algarve / Portugal
With a very low minimum wage, very few foreign owned businesses offering full time or even official (legal) employment, an abundance of Brazilian and other former colony workers, practically no commerce outside tourism, the Algarve is not a place for someone to come job seeking! Sure, many expatriates make a living on the Algarve, running their own business. But the only work opportunities for less inclined expats is pretty much unofficial part-time cleaning work (around 3.5 Euros per hour) for the more wealthy villa owners of The Algarve.

Hospitals & Healthcare
You will need health insurance unless you are an EU citizen and have registered for residency in Portugal, in which case you can use the public health care system which is not a great idea if you have high expectations. If you have a flexible health cover policy and live close to the Spanish border, it is almost certainly better to get your health care there. Although doctors and nurses in the Portuguese public health care system are to be admired and congratulated, long queues, beds in corridors, overworked staff and limited facilities are a fact of life for Portugal. Even the public Portuguese Ambulance service is basically run by firemen (bombeiros) who will get someone to hospital as soon as they can but with very little medical training or equipment on board. If you want paramedic emergency ambulance cover and / or well staffed and equipped private hospitals, you will have to do your homework.

Preschools
The Portuguese preschool system is one of the best in the world, especially for the price you pay. State run preschools are seen as essential to allow parents the chance to go back to work after having a child and take infants from just 3 months old. If you are a foreign full time resident in Portugal, you qualify for these preschools; if not, not. The problem past qualification is getting your child a place and preschools in the Algarve are reported to have the longest waiting lists for Portugal. Of course there are plenty of much more expensive privately operated preschools available but if these employ foreign staff you may want to check that they run thorough personnel checks (see my crime page for why).

Cost of Living
Yes, Portugal has a very low cost of living, but only if you have the money in the first place. Of course many of the bars and restaurants of the Algarve are priced according to their clientele, thus eroding some considerable advantage; other areas of Portugal are far cheaper. Things like electricity, water and rates are much less expensive than other EU states but you should check my climate and real estate dodges pages for some caveats there!

Southern Portuguese Crime Rate Increasing

Portugal officially is one of the most crime free areas of Europe, along with Spain. But individual areas such as the Algarve are known magnets for the wrong elements in society.

Above: The photofit of the suspected vagrant abducter of Madeline ("Maddie") McCann produced by her parent's private investigation team.

Pedophiles & Vagrants
The Algarve has been frequently described as the European capital of Pedophiles; there are around 150 expatriate British convicted pedophiles alone in the Algarve and certainly many more from other countries given news stories (e.g. Swiss Pedophile Story). The only reason we know there are around 150 British pedophile ex-cons in the Algarve is because of the terrible Madeline McCann case; British police gave Portuguese police a list of known / convicted British pedophiles in the Algarve because Portugal is one of only two countries in Europe without a sex offenders’ register. Yes, 150 ex-con British paedophiles alone; with pedophiles from other countries, the total number in the south of Portugal could well be in the thousands. The fact is, if you have young children, the Algarve may well be one of the least favorable places to take your family.

The Madeline McCann case, apart from giving the Algarve police a bad name for what many say is a badly conducted and repeatedly botched investigation (e.g. one former police officer went on TV 3 days after Maddie’s abduction and claimed the McCanns were “swingers” without evidence; two Algarve police chiefs have now been replaced over this affair, one for criticizing the British police; even Portugal’s chief of police is critical of the investigation and in particular for making the McCanns “aguidos” or official suspects), also highlights another problem associated with the Algarve; vagrants.

The McCanns it seems and popular belief is that a vagrant took little Madeline McCann for money, to give her to pedophiles. A photofit of this alleged / suspected vagrant has been produced as well as witness accounts of seeing someone matching his description passing a young girl to other people. Vagrants from around the Mediterranean have come to the Algarve because of the wealth that is there. Vagrants are often even mostly homeless people down on their luck looking for someone without financial concerns to help them out; but an element are criminal, generally through addiction to alcohol and narcotics. Unfortunately the Algarve has in this respect become a victim of its own success.

Criminal Gangs
The Algarve has seen a recent influx of both British and Irish drug ring bosses as Spain clamps down upon them (see: UK Guardian Article). Unfortunately apart from bringing associated crime into the area, the Irish (often former Republican Irish terrorists) and British mobsters hate and try to kill each other. In addition, 2005 saw the advent of beach robbery gangs in Portugal, where large numbers of disaffected youths, often second generation Portuguese from African / Brazilian parents, would raid and rob beach users on mass. The violent attacks involving expatriate-owned villas by gangs from Eastern Europe and Africa in Spanish luxury villa areas are forecast to increasingly migrate into Portugal’s Algarve.

Fiscal Crime
Tax dodges! Portugal has to be the unofficial EU capital of tax cheats where even lawyers (advogados) and accountants ask clients for payment in cash to avoid paying taxes. But be warned, the Portuguese authorities are clamping down on tax fraud, have their own Tax Police and know they have to solve the problem as their EU membership is forcing it. It used to be accepted that everyone, but everyone cheated on taxes in Portugal, so the government, which needed to collect taxes of course, slapped de-facto luxury taxes (exorbitant registration fees) on things like cars, making Portugal one of if not the most expensive places to buy a car in the EU! The problem is the EU is taking legal action against Portugal to stop overcharging people. Portugal knows it has until around 2011 to reform its taxation system to ensure people pay the correct amount of income, sales and property taxes so they can afford the inevitable EU decision regarding hidden taxes on things like cars.

OK, so tax dodgers may still get away with their crimes in Portugal right now, but in ever-decreasing numbers and those people, including foreigners / expatriates who get caught in the act can expect punitive fines even jail. If you buy something taxable but without a tax receipt knowingly, you are committing tax fraud. If you try and sell something (an Algarve villa for example: see Real Estate dodges) and don’t have tax receipts for the work you had done, at best what you saved in sales tax you almost certainly will pay more in capital gains tax as you will not be able to offset those costs.

Dodgy Portuguese Real Estate Practices

Unfortunately the culture of real estate fraud is rife in Portugal, especially in the Algarve where properties more often sell in the millions then thousands of Euros. It seems that property developers, often using front companies designed to ultimately fail and with them any “guarantees”, sell so called luxury villas on the Algarve on the basis that the price you pay is not the price they register as the sales price, in order to defraud the tax man. The truth often is you get a contract which declares the price you pay BUT the actual registration forms that get filed with the town hall (which you do not sign) declare a much lower sales price! Did your Algarve real estate agent tell you that?!

The Portuguese government has been getting tough on such acts by giving local councils the right to buy any property which has just been sold from the buyers at the declared / registered sales price, then sell it at the true market value and keep the profit! OK, any unwitting victim should be able to argue that one out in court, but who wants the hassle? Especially as Portuguese law drags on for years, not months and does not allow you to reclaim your legal fees! With the front developer gone, lost villas / investments, long lasting headaches and expensive lawyer fees are not exactly a holiday dream.

It can get worse, if you visit my crime page and read about Portuguese Fiscal Crime. If you are none too careful / lucky, buy a villa in the Algarve which gets registered at below market value and then pay for work to be done on the villa without getting valid tax receipts, you could lose a great deal of money indeed.

This problem for villas in the Algarve and Portugal generally being registered below market value as a tax dodge for the vendor is exasperated by the fact the buyer and the seller has the same lawyer! So the lawyer, presumably appointed by the seller as they are in the Algarve already, is more inclined towards them, not the poor villa buyer! In irony, it is better to buy a villa from a foreigner who is leaving Portugal than it is from a Portuguese individual or company or resident foreigner. Why? Because someone leaving Portugal does not care about the capital gains tax laws enough to cheat on the registration document (house deeds) value! In any event, if you buy a property in Portugal you should unfortunately insist on seeing the registration document and going with the lawyer to file it.

Portuguese Property Market / Investments

Two reasons the Algarve is such a bad investment area for property are;
a) The Algarve has “enjoyed” a property price boom like many other areas of Europe while the rest of Portugal has not. Therefore properties in other Portuguese areas are not as inflated as villas on the Algarve.
b) Property prices in the Algarve are typically €4,000 per sq. m without land to speak of, €5,500 per sq. m if you get decent grounds with it (important to stop something being built next to and overlooking you. In the commercial and political capital Lisbon, property without land is around €3,000 per sq. m. This inverted correlation is therefore unsustainable based on Portugal’s GDP.

Despite this most real estate agents continue to promise sensational returns of property investments in the Algarve. But when you look at what some of the more respectable estate agent names are saying, while they are hardly unlikely to paint a picture of doom and gloom, what they say is hardly inspiring! UK realtors with offices in Portugal Winkworth told the British "Independent" newspaper in November 2005 regarding the Algarve that "There are areas where you can still get in at a good price and where you definitely won't lose money". Which seems to mean exactly what I fear, there are many areas of the Algarve which will see investors making a loss. Part of the problem for serious investors is that offshore company owned villas have recently been legislated against by the Portuguese with punitive taxes for so called “blacklisted” offshore locations. This means finding a safe offshore haven to own and control your investment is increasingly fraught with risk in that if your offshore location gets added to the blacklist, the taxes will likely force you into transferring title to the property in your own name. This in itself then causes extra tax burden as such a transfer from one entity to another requires the property to be revalued at the current market rate for tax (including capital gains tax) purposes. Although Portugal still has one of the most favorable taxation systems in the EU (for example it does not have a wealth tax, nor is there inheritance tax for immediate family), making money from real estate investments using loopholes is all but gone.

Of course real estate investment also needs to take into account any rental returns you may make, but the law in Portugal has tightened over this aspect too thanks to a general necessary increase in taxation diligence (see my cost of living page). Whereas it used to be possible to make an unlawful income from renting out Portuguese villas to holidaymakers, this is being clamped down on by Portugal which has double-taxation treaties with other EU nations now. Added to all of this a seeming downturn in tourist numbers to the Algarve as a backlash to the Madeline McCann case, revelations that the Algarve is a centre for pedophiles and increases in other forms of crime (see my crimes page), then the holiday / vacation rental potential and with it the disproportionately high prices of properties in the Algarve seem set to tumble on top of this.