Farmers’ Market: a Rural Housing Boom in the Making?

Flavia L. Lamattina

The construction of affordable housing in Portugal may get a boost from a new land law from 2024. As part of the “Building Portugal” program, legislators amended the Legal Regime of Territorial Management Instruments (RJIGT) to make it easier to open farmland for residential development, subject to reserving 70% of the square footage for affordable housing. While experts in the real estate sector view this as a positive step toward addressing the housing crisis, they warn that this measure alone is unlikely to stimulate housing construction without additional financial incentives, particularly a reduction in the VAT on new construction from 23% to 6%. There is also a risk of creating isolated urban areas. Experts argue that the new law will only increase the supply of affordable housing if it is accompanied by coordination with local governments, streamlined processes, and fiscal incentives to attract developers and real estate investors.

While experts generally view the initiative positively, they point to several challenges and limitations that could hinder its effectiveness. Converting rural land to urban use could take years. Approval of the required local-zoning variances will still run through the municipal authorities, a process that can be slow and bureaucratic in the best of times. The conversion amendment requires those local decision-makers to take into account several highly technical national frameworks regulating impacts on things like the environment, transportation networks, even national security. The cost of land remains unaddressed. If prices are not regulated, they might shoot up in the ensuing land rush, which could discourage developers from investing in affordable housing projects. Another risk is the creation of isolated urban areas—new neighborhoods disconnected from existing urban centers and lacking essential amenities and businesses. These areas may struggle to attract residents.

Given the lack of financial incentives, the expectation is that developers who might be interested in building on reclassified land are likely to be local players with a deep understanding of the market and municipal regulations. Family offices are expected to show the most interest, as they have the expertise needed to navigate local regulations and approval processes. Large international investors may be less inclined to engage due to the complexity of the reclassification process.

The impact of the new land law will likely be most significant in the metropolitan areas of Lisbon and Porto, where demand for housing is highest, and property prices have surged in recent years. In these areas, building upwards is often not an option due to entrenched zoning restrictions, making peripheral development more attractive. Developers could benefit from rising demand and higher sale or rental prices, improving the profitability of projects.

Even where cheaper rural land is available, developers will need to carefully assess the total costs involved, including land acquisition, infrastructure development, construction expenses, and bureaucratic fees. Because the land being reclassified is not yet urbanized, developers will need to install essential infrastructure such as roads, water, electricity, and sewage systems, which all add significant costs. Under the proposed law, developers must complete infrastructure and housing construction within five years of reclassification. Otherwise, the land may revert to its original rural classification.

The law’s potential to lower housing prices is promising but uncertain. Minister of Territorial Cohesion Castro Almeida believes that increasing the supply of buildable land will eventually reduce housing prices. However, the process could take years, and the law’s success will depend on how effectively local governments, developers, and policymakers work together. Even though the government has set a five-year deadline for completion, the actual construction of new housing will depend on the responsiveness of the construction sector and potential changes to zoning and building regulations.

Another measure of the success of the law will be how the 70% mandate on below-market housing plays out. Prices for these homes will be capped at the national or local median price. However, in high-cost areas like Lisbon and Cascais, the cap could be as high as 2¼ times the national median. Developers can sell the remaining 30% at market rates to cover costs and secure profitability.

Will the economics of the real world allow the ultimate goal of the rural-land conversion law to be fulfilled, i.e. to break the housing-cost fever that is keeping so many working Portuguese families back from owning a home, or even moving out of their parents’ house? It looks like we will have to wait a few years for the beginnings of an answer.