Portugal’s new land law “useless” without cutting VAT says developers association

While welcoming reforms to Portugal’s obsolete land law – or ‘soil law’ as it is called locally – that will allow affordable housing projects to be built on rustic land, the country’s real estate developers association slammed it was “useless” this week while VAT on new developments continues at 23%.

The Portuguese Association of Real Estate Developers & Investors (APPII) have been pushing for a reduction in VAT from 23% to 6% on new-build projects for some years.

It says that with developers faced with the sky-high costs of raw and wholesale building materials used for construction, which has only exacerbated since the Covid-19 pandemic, and continuing red tape in the time it takes to get housing projects passed by municipal councils in Portugal, developers simply have no incentive to build affordable homes for the middle classes without running the risk of losing money.

It is why they have been asking successive governments to slash taxes on new build properties so that they can cover their costs, make a profit, and provide much needed housing in a country that has a serious affordable housing crisis.

Th association says because of the bureaucracy there are projects that have been held up in municipal council planning departments for five, six or more years resulting in developers, which have to operate according to a strict timelines, losing money hand-over-fist.

This and high taxes mean that not all the parcels of rustic land when converted into land for development end up being economically viable.

“The law in concept is positive. It solves the problem of the lack of available land, especially in urban areas, it frees up soil”, admits the president of the Portuguese Association of Real Estate Developers and Investors (APPII) on the positive side.

Hugo Santos Ferreira represents a sector that will gain from the law but understands that the main beneficiary is the country. “More than real estate development, those who really stand to gain are the Portuguese who currently do not have homes to live in,” he says.

The praise, however, is accompanied by warnings. “It’s a positive measure, but alone it is useless. It will solve a problem of lack of land supply, but we can’t build because of the tax burden”, he accuses, specifying that: “If we don’t lower VAT on construction from 23% to 6%, this law is useless”.

And he compares it with the tax framework in other European countries. “Spain and France have deductible VAT on housing construction. Portugal has VAT at the maximum non-deductible rate”. “What’s the point of having land if we can’t build anything there (because it’s not economically viable for developers)?”, he asks.

Santos Ferreira adds, “In addition, the law is designed to lower the final price – but does not regulate the initial one.”

The regime provides that about 70% of the land released will be used for the construction of housing at moderate prices, subject to limits calculated from the average sales of family homes compiled by the National Statistics Institute. But it says nothing about the prices at which these lands are initially sold to the developers.

“The law puts a ceiling on the retail price, but not on the up front cost”, sumarises Hugo Santos Ferreira, stressing that “if a rustic land becomes urban, it is natural that the owner will want to sell at the best price”, which can invalidate projects.

After calculating all the costs involved, including not only the acquisition but the construction, “the numbers may not add up to a profit and the deal can fall though”.

In the law, “nothing is said about the price at which they have to buy. I fear that this will make many projects unfeasible”, he warns.