Start a Business in Lisbon?

I’ve been asked a question. It’s an old one. Those of you who have been reading my material for some time will know my views on buying homes abroad, and especially holiday homes. But what about businesses?

I’ve been asked whether it’s a good idea to buy a property (or two properties) in the Lisbon area. The problem with this is that every deal is unique, but let me throw out a few questions, and make a few observations.

First, I would be very wary of starting any business in the eurozone at this time. You may be successful, but it is a time to be wary. You would need to check out how similar businesses are going, and what the competition is. Is there room for more? In my experience there is very little room for many traditional businesses. The way to find out is to rent somewhere for three months and wander round the businesses and see for yourself how they are doing.

The second thing to look at is the business climate. Some countries are pleased to see you. Panama is one, Singapore is another. There are good places to work in. You dont even have to work in Singapore. How about KL? Dont want to go so far? Then why come to Portugal? There is an anti-business climate here.

You should go where the tax structure favours business ventures, especially start-ups, which is why I mentioned Panama. Check it out. Portugal has a tax structure that seeks to close down businesses.

Let me show you something very simple which will show you what I mean. Tax structures are put in place to do one of two things. The first is to bring in enough money to fund government expenses. The second is used to discourage some activity. Tobacco is taxed highly, ostensibly to discourage users. Certain activities are taxed heavily because they pollute, and so on.

However, let’s have a look at how Portugal’s tax system works. A small business is heavily taxed, and the level of purchase tax (IVA) is punishingly high at 23%. At that rate it is set to discourage the purchase of goods and services. This will tend to depress the manufacture of goods and the provision of services, and so the economy will contract. That is apparently what Portugal’s government wants. Is that the kind of business environment you want to enter?

Let me explain how revenues are usually collected. All taxation is primarily based upon the maximising of revenues. This is done by using a bell curve model and test taxing. A bell curve is a mathematical structure which looks like a pregnant woman, or a guy with a beer gut, viewed sideways. In other words we have a straight line to the right, and a curve to the left. The curve starts at 0 at the top and ends at 0 at the bottom. Each of these points represents the collection of zero tax.

What any government seeks to find is what is called the sweet spot, the band where most tax is collected, the fattest part of the curve, or the furthest extent of that beer belly. When you find that region you keep your tax levels close to that point. If you move away from that band you will automatically get less tax. So, if you raise taxes it means either of two things. It either means you haven’t found the sweet spot yet, or that you want to decrease the tax take for some reason, or, alternatively, seek to depress that particular market.

Portugal has decided to make its tax system punitive instead of productive. It has moved away from the sweet spot. There will therefore be a lower tax take, and people will be discouraged from making money. That’s not a good environment in which to start a business.

It doesn’t mean you wont be successful, but it does mean there are head winds to cope with.

There are other points to make on this subject, but I’ll come to them next week.

Buying Advice

If you are considering buying real estate some time in the new year, what are the things you should be looking out for?

Remember what I’ve already said about current conditions. We are centred in Western Europe. Housing prices have risen from dire levels to about as high as they can get relative to current wages and accumulated wealth. They are not going to repeat that rise. What will happen is that prices will rise and fall with economic conditions. Conditions are currently bad, so prices should fall. They will fall. Someone looking for capital gain should stay out of the market until prices are on the floor, and beginning to rise again. Then you buy and hold.

Remember, real estate is an investment for the long term. That means you should expect to be invested for a reasonably long run, maybe seven years to get a decent capital gain. You can then expect to be out of the market for a long time, probably another seven years. There is no hurry.

First warning: dont listen to anyone telling you there is “a window of opportunity that will soon be closing”. That is not true. It is hype to get you to part with money. Dont fall for it.

Historically you will find that property as an economic indicator lags everything else. The economy will recover before property prices rise. It has to be that way. People buy when they feel rich, and they have money. They only feel that way once the good times have returned. Maybe two years after that they’ll pour back into the property market. You will always have plenty of time.

The way to make money is to buy low. Most people buy at the top of a market, and when it falls they panic, and sell. Serious investors do the opposite.

Never buy off-plan in a mature market. If you want to buy off-plan, invest in Brazil where the market is tearing along at a break-neck speed. Towards the end of the last bubble off-plan properties were being advertised all over Spain and the Algarve at twice the normal resale price. They were advertised as being discounted. Desperate developers are still trying to pull that one. Dont touch them.

The way to deal with any pricing situation is to look at the resale prices of similar properties in your local paper and compare them with the discounts offered by developers. Those discounts are usually invented.

Dont ever trust bank valuations. Banks are out to make a profit. If they have a developer on their books who is into the bank for a rather hefty development loan, and the market has collapsed, they have a problem. They need to solve that problem, and the easiest way is to look for a bunch of suckers to come along and take over this development loan. At the very least the bank will have spread the loan risk among a bunch of purchasers. They want you to sign up. They dont care whether their valuation is phoney.

Put this another way. Look at dozens of ads in the press. Get a feel for the real value. Then offer less.

Remember there is no such thing as BMV (below market value). Market value is the price you buy at. It cant be below that price. It is only at the price quoted because no-one will buy at a higher price, so it is the market price. Forget the so-called valuation. The market price is the price the seller can get. If it’s lower than a surveyor’s valuation, then the surveyor needs to wake up and get his prices right. Dont get fooled.

There is a particularly difficult decision to make at the moment concerning mortgage payments. Interest rates have never been lower. This means you can borrow more than you would have been able to do three years ago. This is a very dangerous situation.

I usually advise my clients to buy when interest rates are high but steadily falling. Let me explain why.

When the economy of a country goes south, and times are hard, governments borrow to pay their debts, and banks clam up, and interest rates start to rise. This makes borrowing more expensive so you now have two reasons why property prices will fall further. First, people feel poorer and wont chase up prices. Secondly, mortgages cost so much more that people simply cant afford them any more, and they have to sell. More properties coming on the market drive the market lower, and prices keep falling.
When the economy turns round interest rates start to fall, and people start to feel better off. House prices are on the floor, so you can buy cheap. As interest rates fall your mortgage payments lessen, so more people can afford to buy, and the price of your investments goes up, so life is all sunshine and short skirts. That’s the way to invest.

Do remember, a 2% rise in interest rates leads to a 30% rise in your mortgage repayments. That’s serious.

Think back. Only two years ago interest rates were much higher than they are now. How long before they go back there?

I cant answer that question. I have never lived through such an insane economic palaver as I am now witnessing. I foresee a continued political charade being played out as politicians try to control the uncontrollable. It will end badly, but how and when I have no idea. What I do know is that interest rates will go up at some stage in the not too distant future. You need to know you can cope with at least a 30% rise in your mortgage payments, otherwise you will be squeezed.

I dont like risk, so I wont buy in Europe at all unless I know exactly what I’m doing and have myself covered three times over.

So there is my next warning. Dont be fooled by the ads that tell you that you can be the proud owner of a brand new apartment for only €5,000 down. “Only” is a rude word. It’s not only €5,000. It is also the next 25 years paying a mortgage with interest rates higher than they are now at some time in the future, maybe next year, but dont quote me on the timing.

Buying real estate as a wise investment for the future is not a good idea in Western Europe any time soon. I’ll tell you when it is. Meanwhile I’m buying where the action is, and interestingly, they speak Portuguese over there.

Wither Spain and Portugal?

Let us have a look at what is happening to real estate in Spain and the Algarve, and, armed with that knowledge, see what the year ahead has in store for us.

There are several factors that control what happens to the housing market. Let’s first list the factors that have little or no influence at all. Those who want to buy may be an important group, but more likely they are of no importance at all in the market. Why do I say that? Simple. I want to buy an aeroplane as I love flying. However, I wont be buying because I cant afford one. The same goes for that Ferrari I fancy.

How about those who do want to buy and have the equity but not the cash? The boomers are beginning to retire. There are a lot of them. They may well fancy retiring to the Algarve, but can they sell their home in Northern Europe?

We need to analyse these situations and see whether they are indeed favourable for the housing market in the south.

Secondly we need to look at the value of real estate south of the snow line. Are the prices realistic, or are they inflated?

Thirdly, we need to look at the current state of the market: how much real restate is empty and up for sale?

The retiree market is in trouble at the moment for the simple reason that people with homes in the UK, and especially in Ireland, are having serious trouble in selling. Unless they can sell for a suitable price they wont be buying here. There is also the problem set by the high value of the euro. When I first came to live here the exchange rate was about €1.55 to £1. Recently it has been trading around €1.20 to £1. That makes euro-priced houses much more expensive. The exchange rate alone has pushed up the price of a home to UK buyers by more than 20%. That’s some hike to cope with in a recession. As the English have traditionally been the biggest buyers that is a big dent in the market.

For the Irish there is the problem of house values back home. They have dropped by between 30% and 50% already. In some cases a similar drop is likely. They certainly wont be out in force as buyers any time soon. That is also another big dent in the market because two or three years ago the Irish were buying in droves.

Any buyers will have to be coming from countries like Norway, where economic conditions are still relatively rosy, or from countries where the number of existing emigrants has so far not been very high. All I can say here is that I hope they will be coming. We desperately need them.

With crashing economies in all directions the emphasis is now on value for money and downright cheapness. Is Spain or the Algarve cheap?
Let’s go back and do a simple bit of maths. There are two calculations you can do, but the most important is simply to work out what it would cost to rent, and then see how the price to buy stacks up against the rent. If it doesn’t stack up there is little incentive to buy when you can rent more cheaply, and if you want a change, you can just give in your notice and walk.

Alternatively you could look at your purchase as a business venture, and base the value on a simple rental return. Your ROI would then be the percentage return on the cost of the house or flat. If that return is less than about 7% (the usual market rate) it would be a lousy deal, and no businessman would entertain it. Conclusion: the purchase price would be too high.

You need to find out what your apartment/villa will realistically rent for. Let’s say you can get €100 a week for a small two bed apartment. If that €5,000 rental return equals a 7% ROI, then the purchase price would equal about €70,000.

The other way of calculating value is to see if the cost of the purchase is roughly the same as the cost of the money needed. If you rented that apartment the annual rent would cost you €5,200 a year. If you borrowed money to buy the property, would you be paying more than that or less? Money costs about 3.8% these days. What this means is that by this calculation your flat is not really worth more than €125,000.

So there you have it. If you can get €100 a week for your nice apartment it is in real terms worth somewhere between €70,000 and €125,000.
If you want to know where you stand on the value scale you first have to find out what you could realistically get from renting (always assuming the customers are there in the first place), and then ask yourself why any sensible person would pay more to buy than they would to rent.

Remember I am trying to compare like with like. I am comparing the cost of the rent with the cost of the money. And dont tell me you already have the money so it doesn’t cost anything. That ignores the opportunity cost. If you spend the money on a flat you dont have it available for any alternative investment, and in these hard times cash is king. You can get serious returns on money these days. If you are getting less than 10% you are simply not looking in the right places. 10% of €70,000 is of course €7,000. The rent is nowhere near that, which makes that alternative valuation of €125,000 look a bit high. Why would any sensible person give up an investment bringing in €7,000 to buy something you could rent for €5,000?

Capital gain perhaps? Ha ha. There wont be a capital gain on something that is too expensive in the first place. To get your capital gain you have to buy cheap, and in hard times, super cheap.

Finally, let’s have a look at the state of the market. By this I mean the number of properties for sale and the number of buyers out there.
Take a walk round Lagos. There are empty apartments as far as the eye can see. Try Portimao; the same problem. Behind me is a whole estate that has been built for two years. There are fifty or sixty apartments. About six are inhabited. Wherever you look are empty buildings. There are probably 50,000 apartments for sale, and half as many again would be for sale if there was any market for them.

Go across the border into Spain. There is a totally empty estate built where Ayamonte faces the Guadiana. The Esuri estate the other side of the motorway has about 12 residents. It’s about the size of Welwyn Garden City. Drive along the coast to Huelva. There are miles of the darn things. Keep going right round to Barcelona. It is going to take more than a decade to shift this lot. Prices of apartments should be on the floor. They will be for years.

I’m sorry to say the news is not good for tourist-land. Prices have gotten way over where they should be, and, sad to say, what goes up, usually has to come down. What a bummer!

Okay, that’s for tourist apartments, but what about villas perhaps in inland towns and villages?

Here things are slightly different. If you are out of a tourist trap you can at least sell to locals instead of relying solely on expats and tourists. That means you have a much better chance of actually getting a sale in the first place. That is a major advantage.

Secondly, there are far fewer units for sale. You dont have that massive overhang in the market that will keep seaside tourist spots in the doldrums for years. Inland you are far more likely to find that prices stabilise sometime over the next year or so. Not only that, you will find that by buying outside the tourist traps you will be buying into a far less risky market. I think tourist properties will continue to decline in value whereas those in proper independent towns will hold their value.

You will note that on the Unique Property site we dont sell apartments. We sell properties that already have an individual value. The individualness will in all probability mean that prices will be largely maintained, and any losses will be minimised.

What I cant predict is what will happen if the euro starts to fall apart. But if it does, prices across all of Europe will be affected, and I haven’t a clue how the chips will fall.

Villas for £50,000

Okay, the scheme is now up and running. You can now buy a detached villa a couple of miles from fabulous beaches in the Algarve for only £50,000.

For the record, I am writing this at 7.15 on a saturday morning. The sun is lighting up the row of trees at the end of my garden, there is not a cloud in the sky, I have been watering my broad beans, and despite the early morning chill I only had on a light jumper and slacks. In a couple of hours I’ll be in shorts. Next month the daffodils will be out. You could be here as well.

Check out the write-ups. There is a holding page at:
At the bottom of this page are links to a proper write-up, and a website with full specification. If you like what you see, get back to me, and we can start to design your new home.


Cheap Villas

Cheap Villas for sale in the Algarve

I know I have taken longer than expected but we are ready to go.

We already own a building site in a quaint Algarvean village just three miles from the sea. We have been offered an old manor house with some parkland just a little further down the road which we will be developing next. We have done a deal with another guy who owns land alongside a golf course on an island in Indonesia. And we have done another deal with a guy who owns hundreds of hectares of land between two rivers, and bounded by a fabulous white sands beach in North-Eastern Brazil.

We are going to build our ultra modern villas on these plots of land, and they will be available for sale at silly prices.

The cheapest of the villas will be a two bed detached home, built from modern eco-friendly materials, and will be for sale for £50,000. You wont find anything as cheap and as good as this anywhere else on the planet.

If you want details, get back to me. I shall be making regular posts on this blog to keep you up-to-date on how things are going. Stay tuned.

Portugal and the Ministry of Invention

There’s something about Portugal. I dont quite know what the problem is. Maybe they have a naturally surrealistic turn of mind. Maybe the system of thought police is well organised, or maybe they are a nation living in some kind of fairy tale.

They deal with this quite simply by having a Ministry of Invention. Perhaps other countries have such a government department, I dont know. Portugal’s Ministry of Invention is quite busy.

A couple of years ago the tourist industry fell through the floor and we had the lowest number of tourists for a decade. The Ministry of Invention was soon on the job, and put out a news flash that it had been the fourth best year of all time.

When the news came through that there was to be a ban on smoking in bars there was uproar. No-one will take any notice, said most of my friends. But the Ministry of Invention was right there taking notice alright. It wont affect Portugal they said because only 18% of the population smoke, and the young people dont smoke at all.

Of course, what they meant was that about 18% of the population dont smoke, and they are the pensioners who cant afford to.

The weather has been unusual this year. We had a massive amount of rain from mid december. It just went on raining and raining. My swimming pool (which started the period empty) filled by 42 inches in four months. That’s nearly three year’s normal rainfall.

Not only that, but summer just refused to come on time. Month after month people were going round with coats on, asking when the summer was going to start. We’d have a few days of warm sunshine, then the clouds would be back, and we’d all be wearing pullovers again, and taking the umbrella with us.

I left in mid june, and still the weather was dodgy. We’d get occasional fine days, but generally speaking it was chilly. I certainly didn’t hear of anyone having to switch on the air conditioning.

However, now we have the official report from the IM (I assume that is shorthand for the Ministry of Invention). May and June in Portugal were the hottest on record!

Everyone I spoke to, not only in the Algarve, but in Northern Portugal as well, claims May was the coldest anyone could remember. So I suppose it comes as no surprise that the powers that be decided this could be bad news for the tourist industry and got onto the Ministry of Invention, and asked them to do something about it.

Portugal doesn’t like to be left behind. Global warming is still the in thing. Never mind that the harvest in Iowa was stopped by heavy snowfalls. Never mind that we discovered that the temperature reports had been “adjusted”, and that the whole thing was a massive fraud. Portugal was still staying with the old story.

Apparently someone did a spot of research to show that temperatures in Portugal had gone down over the last century. We couldn’t have that. If temperatures were rising around the world Portugal was not to be left out. I dont know who alerted those clever folk in the Ministry of Invention, but they were on the job in a flash.

The figures showed, so we are told, that during the last 110 years no less than 304 months showed above average temperatures. Conclusion: Portugal is getting hotter. Reports were rushed out to the press. There were computer projections showing that if this went on, within 25 years the Algarve would be like the Sahara Desert.

When I went to school 304 months equaled about 25 years. The last time I looked 25 subtracted from 110 left pretty close to 85. So, if 304 months showed above average temperatures, that means that 85 years out of those 110 had temperatures that were normal or lower than normal. So that is apparently why the Ministry of Invention could boldly state that Portugal has been getting hotter.

It’s been a busy time at the Ministry of Invention. They must have employed some pretty clever mathematicians to find their average. 25 years above an average, and 85 years at the average or below it. Sounds suspicious to me. But then what’s a Ministry of Invention for if they cant invent a new mathematical paradigm?

And do have a look at my Algarve letters at the Unique Property Site.

Cheap Villas in the Algarve

A few pals of mine are at present discussing a couple of deals. I’d be interested to know if any of you would be interested. I do need to know if there is going to be a market for these deals.

Two sets of plans are currently on the table. The first is to open a camping site for motor homes in Portugal. There already are a few, but they are expensive, badly run, and have crummy services. We can do better. We are planning on opening one just outside Silves in the near future. If you’d be interested in this facility email me from the Unique Property site.

The second deal relates to cheap housing. We are over-run in the Algarve with highly priced apartments. You can buy one for €200,000. That’s about twice what they are really worth. (If you think that price is reasonable, just read my book on how to value a home both in the UK and anywhere abroad, you may be shocked at the result you’d get by following my valuation method: However, we want to produce detached two/three bed villas with a starting price of £50,000.

We have a large stretch of land (over 200 hectares) with planning consent for 600 beds. That means we can build 150 villas. We would use very modern materials that are both cheap and eco-friendly. Some of the properties would be built on decking set partly over the edge of a small lake. They would be between 120 sq.m. and 150 sq.m. in size.

I think this is the way forward. Property has gotten too expensive. It doesn’t need to be that way. We can sell for just above cost. What I’d like to know is: Is there a market out there for cheap villas in the Algarve? Let me know what you think.