Building A Property In Portugal: From Dream To Reality

Abode2 spoke to Joana Neto Mestre, Managing Partner of MATLAW, to find out what elements investors need to consider when building a property in Portugal.

Joana Neto Mestre, Managing Partner of MATLAW

What practical elements should foreign investors consider before proceeding with a property construction project in Portugal?

Foreign investors must consider several practical aspects when pursuing a property construction project in Portugal. One of the most important things is to know the local legislation and regulations. It is crucial to understand the licensing requirements for building in Portugal. This includes building licenses, environmental permits, municipal approvals, and local zoning regulations that can influence the type of construction allowed on the land.

Other points one should take into consideration:

- Carry out a detailed property market analysis to understand the potential of the project (sale and rental prices in the area of interest, demand for similar projects, etc.).
- Know the applicable taxes, such as IMT (Municipal Transfer Tax), IMI (Municipal Property Tax) and VAT (Value Added Tax) applicable to the construction.
- If necessary, explore financing options available in Portugal and consider obtaining local financing.
- Hiring qualified local professionals to design and to supervise the performance of the project,
- Assess the accessibility of the site and the availability of infrastructure such as roads, utilities (water, electricity, sewage) and transport.
- Working with lawyers specializing in real estate law to carry out proper due diligence, assist with the draft, review and negotiation of all contracts and agreements, such as construction contracts, project management contracts, architectural service contracts, project financing contracts, amongst other, as well as to ensure licensing and registration of the property.

Let's start at the beginning. What is the first thing investors should be aware of?

The first thing investors should pay attention to when starting is defining where and what to build. Buying land should be preceded by architectural and legal research into what can be built in a given area and to what extent. Otherwise, the whole project can be jeopardised.

Next, you can think about the type of property you want and, with the help of your chosen architects, prepare an idea for a building or renovation project and submit an application for planning permission or licensing (depending on the project and location).

During this process, it's essential to get information on the applicable urban planning legislation and regulations, both at the local and national levels. It is also essential to confirm any existing restrictions and parameters in the area where the land is located.

The planned property must comply with all legal and construction requirements and be built according to the project approved by the relevant town hall.

More recently, a Portuguese government initiative aimed to simplify and reduce bureaucracy in urban planning and construction licensing processes, has reduced the number of steps required to obtain building permits. This speeds up the start of construction and reduces the time and associated administrative costs.

Another essential aspect to consider is financing the project through a mortgage or a credit agreement granted by a Portuguese credit institution. Financing construction projects requires an assessment of the land, the project and the builder's proposal, and the release of funds is often dependent on the progress of the work being confirmed by the lender’s surveyors. This is to ensure compliance with the scope of the funding and the use of the loaned amounts in the project.

Knowing the applicable taxes is certainly an important point for investors. What are the main taxes to consider?

For investors willing to buy a building plot in Portugal, the costs involved include taxes and fees, licensing costs, and other charges.

The main taxes to consider for a plot purchase are the Municipal Property Transfer Tax (IMT) and Stamp Duty (IS). IMT varies depending on the value and the type of property. For building land, the rate is generally fixed at 6.5 percent of the purchase price, being the Stamp Duty 0.8 percent of the same value. In addition, there will be lawyers’ fees and registration charges.

Then there are the public Licensing costs to be incurred before starting construction, which include the Building Licensing Application and Final Licensing Fees, amongst other. Licensing fees can vary according to the municipality and the type of project.

Once the work has been completed, you should also register the property at the Land Registry Office and pay the Municipal Property Tax (IMI). This tax is levied annually and calculated based on the property's ratable value. Knowing your tax obligations and paying your IMI on time is essential to avoid penalties.

It is advisable to consult professionals specializing in this type of operation to obtain detailed and up-to-date information on each case.

You also mentioned hiring professionals to handle the work. What should investors ensure for everything to run smoothly?

The team should consist of an architect or engineer and a contractor. We also recommend a project manager (usually with engineering background) especially in cases where the investor is not from Portugal.

It is crucial to check the project team's experience and portfolio, obtain references from previous clients, and make sure they are licensed and registered with the Portuguese Architects or Engineers Associations.

The selection of the contractor should take equal care, starting with reputation and references. Ensure that they have all the necessary certifications and licences to operate legally, have civil liability insurance, and offer guarantees for the work carried out. In Portugal, builders are licensed by IMPIC (Instituto dos Mercados Públicos do Imobiliário e da Construção). Market tests and private tenders can be used to obtain different proposals for private projects.

It should also be noted that a construction contract must be signed between the owner and the appointed builder. Many aspects of the construction, including the timetable and duration of the project, specifications, price and payments, additional works and changes to the project, penalties and guarantees, provisional and final acceptance, and dispute resolution mechanisms, will be negotiated and established in this contract.

A project manager is fundamental to the construction project's success, in terms of time, quality and costs. The role of project manager can be carried out by the architect or by an independent person or organization. This role is essential to prevent the owner from managing the work directly and without professional support, especially if they live abroad or have no background in the matters at stake and cannot have eyes and ears on the ground.

Once the work has been completed, foreign investors must consider various aspects to ensure the project's success and maximise the return on investment. Which ones do you emphasise?

The first steps are to gather a set of documents issued by all the technicians involved in carrying out the work and obtain usage licensing before the relevant town hall. Inspecting the finished property may or may not be mandatory, depending on the project. After this process, the town hall may or not issue a license attesting the legality and suitability of the property for its intended purpose.

Once the property has been licensed, the owner finally has full rights over it, namely the right to use, rent or sell it, provided the property is duly registered with the competent authorities.

With Simplex Urbanístico, licensing processes should be expedited. The implementation of the BIM methodology will also enable more efficient and integrated management of construction projects, improving coordination between different professionals (architects, engineers, licensing authorities) and reducing errors and omissions in the project.

Another point that investors should not forget is property management. The owner should consider hiring a specialized company to ensure the maintenance of the property, especially if they don't live in Portugal.

Building the property of your dreams is very exciting, but the challenges are significant, especially for foreign investors. The proper guidance and advice from a team of professionals is fundamental to a successful outcome and will allow the owner to manage expectations, saving time and unforeseen costs.