Algarve Real Estate back in Favour with Investors

The financial crisis hit Portugal hard and its real estate went from being the investors' dream to a complete nightmare as property prices hit rock bottom. But with swathes of glorious beaches, numerous world-class golf courses and mild climate, the Algarve is enticing property buyers back in their droves once again.

The Algarve, located on the southern coast of Portugal, has been attracting tourists and second home buyers since the 1970s. However, after the financial crisis hit hard, investment in the country weakened with no new development in the region for a period of seven years.

During the market's peak of 2007, property prices in the Algarve soared due to consistent high demand, mainly from British buyers and in 2015, the Brits are back with a vengeance, wielding a strong pound in the Algarve's weak euro market. With property prices still heavily discounted to peak levels, there are plenty of bargains to be found in Portugal's perennially popular tourist hotspot.

Recovery is projected to strengthen

2014 proved to be pivotal for both Portugal's property market and its economy with the green shoots of recovery starting to appear. In June this year, the Office of Economic Cooperation and Development (OECD) reported that: "The Portuguese recovery is projected to strengthen on the back of strong external demand, a weaker euro and lower oil prices. Domestic demand has started to rise and business investment is projected to pick up further in 2016."

Construction has also picked up considerably in the Algarve with several luxury resort developments springing up in the region and many more in the pipeline. Prices for a beachfront studio apartment start from around €110,000, with three-bedroom apartments on brand new coastal developments at around the €400,000 mark.

Due to the Algarve's strong appeal to tourists throughout the year, rental revenues are generally consistent if buying a holiday let. Investment properties yielding up to 8.3% are becoming widely available in resort areas where there is strong rental demand and significant capital growth potential.

Mark Lenherr of E3 Property is behind luxury development The Keys, a 48-villa, 24-apartment complex in the Algarve's premier resort area, Quinta do Lago. He recently commented: "We spread the build out over four years because the market clearly wasn't ready two years ago. Today, the strong British currency and tax incentives like the golden visa scheme and non-habitual residence status are all helping generate confidence."

Renewed investor confidence in Portuguese real estate extends beyond the traditionally British market, with buyers from other nations on the rise. Karin van den Hemel, general manager of Algarve estate agents Pine Cliffs Real Estate said: "Real estate in Portugal is changing. We've always had English, Irish and German buyers but now we're seeing new nationalities investing here. We've had our first Chinese buyers, Scandinavians, French and other non-Europeans, including South Africans too."

There are still some concerns surrounding the Algarve's property market and with several resorts in the region still under bank ownership following financial collapse, the future for homeowners in terms of on-going investment and management remains uncertain.

It seems likely that property prices in resort areas where purchases are investor-driven will continue to rise, whereas beyond the tourist hotspots, domestic buying in Portugal has weakened significantly due to high levels of unemployment and a serious need for fiscal consolidation that has resulted in price stagnation elsewhere.

Property prices across the Algarve region increased 9% on average in the 12 months to June this year according to real estate consultancy ILM. In areas with strong and consistent demand for holiday rentals, some resorts are offering leaseback deals and guaranteed rental returns of 4%-5% for investors spending less than two months a year in the Algarve. There are no restrictions on foreign property ownership in Portugal and transaction costs are currently around 15% of the sale price.