Portugal's Towns Crumble as Century-Old Rent Controls Strangle Investment

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Photographer: Mario Proenca/Bloomberg

Portugal's city centers, like the nation's finances, are dilapidated after a century-year old rent control law and restrictions on lease terminations.

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Photographer: Mario Proenca/Bloomberg

Portugal's city centers, like the nation's finances, are dilapidated after a century-year old rent control law and restrictions on lease terminations. Close

Portugal's city centers, like the nation's finances, are dilapidated after a century-year old rent control law and... Read More

Photographer: Mario Proenca/Bloomberg

Dillapidated residential buildings stand in central Lisbon, Portugal, on Thursday, Jan. 20, 2011. Close

Dillapidated residential buildings stand in central Lisbon, Portugal, on Thursday, Jan. 20, 2011.

Photographer: Mario Proenca/Bloomberg

Residential housing is seen through the windows of an abandoned facade in central Lisbon. Close

Residential housing is seen through the windows of an abandoned facade in central Lisbon.

Photographer: Mario Proenca/Bloomberg

The owners of rent-controlled properties don’t have enough rental income from them to spend on their upkeep, leaving Lisbon and other cities pockmarked with crumbling structures. Close

The owners of rent-controlled properties don’t have enough rental income from them to spend on their upkeep, leaving... Read More

Photographer: Mario Proenca/Bloomberg

Century-old controls on rents and evictions are stifling investment in Portuguese real estate and leaving the country with crumbling city centers. Close

Century-old controls on rents and evictions are stifling investment in Portuguese real estate and leaving the country... Read More

Isabel Palma has been trying to sell a seven-story building in Lisbon’s business district for six years. It doesn’t help that the property isn’t generating enough income to pay for maintenance and she can’t raise rents.

The six remaining tenants, including law firms and a hostel, have had their rents frozen for years or simply don’t pay anymore because they don’t fear eviction, according to the landlady, whose family has owned the 1,610 square-meter (17,330 square-foot) property since 1909. She gets a total of 1,100 euros ($1,490) a month in rent.

“I’ve spent six years in court and thousands of euros on lawyers trying to terminate leases with tenants who pay little or nothing,” Palma, 78, said in an interview. “No one wants to buy into a problem like that.”

Century-old controls on rents and evictions are stifling investment in Portuguese real estate and leaving the country with crumbling city centers as rental income fails to keep pace with maintenance costs, according to landlords and property industry groups. The government has pledged to introduce measures in March to streamline rules on rental properties as it seeks to jumpstart an economy that’s had one of Europe’s weakest growth rates over the last decade.

While legislation in 1981 lifted rent controls on new contracts and a 1990 law allowed landlords to set expiry dates on leases, more than half of Portugal’s rentals are subject to the older restrictions. That means most owners are still coping with contracts that never expire and rates that are frozen or limited to inflation adjustments, said Miguel Marques dos Santos, an attorney specializing in real estate at the Lisbon office of Garrigues. Even death isn’t always enough to break a lease because tenants can pass on a contract to their children, spouses or parents.

Legal Bottleneck

A 2006 law gave landlords more power to negotiate prices. However, they can only raise rents if municipal authorities certify that the buildings are in good shape. In four years, just 2,600 of the country’s 430,000 rent-controlled properties have seen an increase, said Manuel Reis Campos, president of the Portuguese Construction and Real Estate Confederation.

Portuguese housing needs about 74 billion euros of renovation work that could generate construction revenue of 535 million euros a year, according to an estimate by Portugal’s Association for Public Works and Construction, known as Aecops. Repairs on all types of structures could attract about 200 billion euros of investment, the group said.

Government Steps

The new laws will aim to simplify eviction procedures as well as the licensing process for renovation work and the mechanism for certifying that buildings are in good enough shape to justify a rent increase. The government is still on course to introduce the measures by the end of March, according to a spokesman for the Environment and Territorial Planning Ministry.

The legislation is part of a package aimed at boosting economic growth. The country faces a 1.3 percent contraction in gross domestic product this year, according to a Bank of Portugal forecast.

“What’s needed is legislation that penalizes those who don’t meet their obligations, whether it’s the tenants or the landlords,” said Romao Lavadinho, president of the Association of Lisbon Tenants. “If they’re legal, we think evictions should be dealt with rapidly.”

Lavadinho said his group supports the right to raise rents following building improvements.

“The problem is that the landlords didn’t do the improvements and they still wanted to raise rents.”

Restrictive Laws

The country had the third-most restrictive laws on eviction in 2009 among the 30 countries in the Organization for Economic Cooperation and Development, trailing only Sweden and Greece, the OECD said in a report published this year. It had the ninth- toughest rent-control restrictions.

The government is raising taxes and cutting state wages to narrow a deficit that was the fourth largest as a percentage of GDP among countries sharing the euro in 2009. Portugal may become the third European Union country to receive a financial rescue package, after the Greek debt crisis caused borrowing costs to surge for indebted nations.

The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, reached a euro-era record of 484 basis points on Nov. 11. The spread was at 360 basis points today.

“The question now is not whether Portugal will be rescued in some form or other, but rather how it will fund economic recovery going forward,” Fernando Paes Afonso, general director of Aecops, said in an interview at his Lisbon office. “Rehabilitation and removing obstacles to investment in the property market are obvious ways to boost the economy.”

Construction Boost

Steps to increase renovation could revive half of the 190,000 jobs lost in the building industry since 2002, according to Reis Campos of the Construction and Real Estate Confederation.

New development still attracts the vast majority of construction investment in Portugal, with only 6.2 percent going to renovation in 2009, according to Aecops. Only Romania spends less on renovations among the 14 European countries for which data was available, the European Construction Industry Federation said. The average is 23 percent.

Owners of rent-controlled properties don’t get enough income to support their upkeep, leaving Lisbon and other cities pockmarked with crumbling structures, Aecops said. It estimates that about 36 percent of the country’s residential buildings are in need of repair.

“Some of these contracts date back to the 60s and pay as little as 5 euros per month for a four-bedroom apartment in the capital,” Luis Menezes Leitao, president of Portugal’s Association of Landlords, said in an interview.

Forced to Buy

The lack of incentives to invest in renovation has caused a chronic shortage of rental accommodation, which now represents less than 20 percent of Portugal’s total housing stock, Menezes Leitao said. That has forced people to buy property instead, boosting debt and pushing up home prices.

“They couldn’t rent, so they bought and borrowed too much money,” he said. “It’s a contributing factor in the current crisis.”

Household liabilities surged to 143 percent of disposable income in 2007 from 29 percent in 1990, Bank of Portugal data shows. House prices have more than doubled since 1990, according to an index prepared by Confidencial Imobiliario, an independent Portuguese property consultant.

Helga Ribeiro, a lawyer at Rosa Amaral & Asociados in Lisbon who represents landlords and property funds, says she doesn’t hold out much hope for change.

“The government has used landlords to subsidize low-cost housing for a century,” she said during an interview at her office in Lisbon. “It simply doesn’t have the money to shoulder the financial burden if it stops, and it will have too much on its plate with other reforms.”

To contact the reporters on this story: Sharon Smyth in Madrid at ssmyth2@bloomberg.net. or Jim Silver in Lisbon at jsilver@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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