Government’s 59,000 new homes will evaporate unless VAT is reduced to 6% on construction

Portugal’s government is running a serious risk of failing to meet its pledge to build nearly 60,000 new homes at affordable prices to help solve the country’s housing crisis unless its reduces VAT on new build to 6%.

So far, with less than a year to go before the end of the Portugal Recovery and Resilience Plan (RRP) in which the EU has allocated €1.4Bn in funds for new housing, as well as funds through Portugal 2030, less than 10% of the homes planned have been built.

The previous PS socialist government led by António Costa had promised 26,000 new homes, but only 2,000 (7.7%) were delivered to families.

“This was to be completely expected because of a lack of home-grown capacity in Portugal to deliver them. Building costs (the costs of materials and labour) don’t make such projects viable with VAT as high as it is at 23%, and things are also complicated through the RRP,” said the President of the Portuguese Association of Real Estate Developers and Investors (APPII), Hugo Santos Ferreira.

On March 7, 2024, the current Government announced that it would boost the public housing offer with another 33,000 homes by 2030 (outside the scope of the RRP), through the creation of a special financing regime under the 1st Right programme – that would mean a total of 59,000 houses.

Hugo Santos Ferreira says the the public offer is “good and welcome”, but “not enough”, and the solution would invariably have to include the private sector, and the only way to make it viable for private building firms would be to to lower VAT on construction to 6% and improve licensing processes.

Essential Business asked the Minister for Infrastructures and Housing, Miguel Pinto Luz, if the government was prepared to reduce VAT on new construction for a specific time period in order to entice developers and construction companies to step up to the plate and get building.

Speaking at a luncheon organised by the International Club of Portugal (ICPT) at a Lisbon hotel on Monday (April 14), the minister said that the government had tried earlier in the year to reduce VAT to 6% on new build, but the motion was thrown out of parliament by opposition parties and would have to await a future opportunity after the elections or have recourse to other sources of funding, such as from the European Investment Bank (EIB).

“Obviously we can’t make this transformation in housing without the private sector being 100% involved. The stock of public housing  promised is 59,000 + 6,800 +2,000 meaning around 70,000 new public housing, and to do this we need an effort that Portugal has not seen in the last 20 years!” he said,  adding that the stock of construction companies in Portugal had fallen in that time too, with many seeking orders overseas and many having gone to the wall in Portugal.

“We’re facing a huge challenge here in Portugal with a sector that has been under capitalised over the past 20 years, and its not just because of problems with the RRP since there are regions in the country where the cash in available but we simply don’t have enough companies to carry out the work (a “lack of capacity” he called it).

SIMPLEX quite complicated

The minister stressed it was absolutely vital and urgent to bring talent to Portugal to work on these public housing projects (as well as in tourism and industry) but to do so with “a human face” and help them to integrate into the community with housing, schooling, and culturally, and treat these people (immigrants) in the most humane way possible.

“And yes, we need the private sector, and this government laid down from the very start the simplification of processes (speeding up planning permission) when we had had a SIMPLEX process (SIMPLEX is a set of laws and programmes in Portugal that aim to improve the relationship between citizens and the government and to make it easier for businesses to operate by cutting red tape) that was worthless and perfectly at odds with the banking sector, the notaries, engineers, architects, and with the actual city and town councils. It was a SIMPLEX that no-one was happy with done by external consultants.

“Now we have a SIMPLEX that people are much happier with and resolves some of the problems with construction licences – one that would have been approved (in parliament) had the government not fallen and become a caretaker government.

“It is a SIMPLEX that will hear the sector, smooth planning processes. But that is not enough. We have to look on a much bigger international scale – looking to Europe and seeing how banks can offer support incentives to private investment too; we have to look at the VAT and reducing it – and here we did. We committed to a reduction in VAT by the end of our term in office but we knew it could not wait until the end of the term, and when we presented the State Budget for 2025 this government asked parliament for permission to introduce legislation to lower VAT, but it was thrown out by the opposition parties”, lamented the current Minister for Infrastructures and Housing, Miguel Pinto Luz.

And what the sector players say…

Last month at an event on the ‘The Future of Construction in Portugal – Challenges and Opportunities’ organised by the American Chamber of Commerce in Portugal (AmCham), the current Secretary of State for Infrastructures, Hugo Espírito Santo, pointed out that the construction sector needed workers, so it was “urgent to attract talent and provide technical and language training while providing decent living and working conditions”.

And because of the rising costs of building materials and logistics, the construction sector needed to be “industrialised along modular and prefabricated lines”, so Portugal needed to adopt these innovative solutions to increase productivity and reduce wastage.

Battered by crises

At that event João Moura, Partner at EY, crystallised the various crises that had hit Portugal’s construction sector over the past 20 years, starting with the recession that hit the sector from 2004, exacerbated by the sub-prime, banking and sovereign debt crises between 2008-2014 in which the sector in Portugal almost collapsed, with thousands of construction companies failing and the fittest forced to seek overseas markets in Africa and Latin America.

The sector has never really entirely recovered, although after the Covid-19 crisis and to 2022 things have been looking up. But looking back, these various crises had reduced the country’s building firms from 112,000 to 56,300, with the loss of 200,000 workers who were forced to work abroad and didn’t return.

And this was clear from the number of developments built over the past 10 years, with projects falling off a cliff from over a million in the 1990s to just 110,000 today.

Immigration, coupled with social and economic problems, had a devastating impact on Portugal’s housing market. The arrival of 1 million immigrants of all income groups, and an upsurge in divorces (60%), combined to create an overwhelming demand for one and two-bedroom homes. With little new build, prices soared, leaving young people essentially locked out of the market.

Building at scale

What was needed was to build and build at scale. “Building 50 houses at a time will not meet demand,” he said, pointing to international examples such as Madrid that had a much more ambitious vision to build millions of affordable homes quickly. The Portuguese government announced the Tagus Cities project in March, with plans for 25,000 new homes for Lisbon in new conurbations, which is a good start.

During the panel discussion, the Secretary of State, Hugo Espírito Santo, said Portugal was trying to attract large international construction companies and that the private sector needed to take a much more active role in driving the market, while qualified skilled overseas workers, particularly from Latin American and Portuguese-speaking African countries, could provide a solution.

António Carlos Rodrigues, chairman of construction company Grupo Casais, said the sector needed to be more flexible, while investing in qualified labour was vital for competitiveness. He added that the industrialisation of the sector was inevitable to increase productivity and reduce waste.

Modular production

José Cardoso Botelho, CEO of Vanguard Properties, said Portugal needed to speed up planning permission licences like Spain had done, which was a “good example of efficiency”.

“Despite Portugal being attractive for investors, its slow bureaucracy continues to be a problem, with planning permission taking ages, putting essential projects, which need to meet specific timelines to be profitable, on ice,” he said.

The CEO of Portugal’s largest luxury residential developer, with €5Bn invested to date in Lisbon, Comporta and the Alentejo, said that the lack of qualified labour meant a 30% wastage rate, which was why construction companies needed modular mass production to keep costs down, reduce wastage and speed up construction times.

John Calvão, Partner and Fund Principal at Arrow Global Group, lamented that “the slowness of the licensing system was the “worst part about investing in Portugal”, with the uncertainty over planning permission processes leading investors to “always consider the worst scenario”.

To date, Arrow Global has invested over €7Bn in Portugal, particularly in its flagship developments at Vilamoura World in the Algarve. Touching on Portugal’s chronic affordable housing shortage, John Calvão put it down to a “lack of offer” and suggested that the government needed to “rethink tax incentives” while “financing strategies” were essential.