|| Part 2 – Long-term vs short-term letting
The pendulum
The boom and bust cycle is a constant phenomenon in many economic areas. Tourism is one of them. It comes as no surprise that holidaymakers are a fickle lot. As with other trends, Local Lodging will not escape the inevitable. The novelty of short-term lets will wear thin. Peace will return to the Eastern Mediterranean, reviving competition in tourism. When the torrent of tourists slows to a trickle, many owners will return their properties to the long-term rental market and reverse the forces of supply and demand.
Long-term rent
It is not a recent phenomenon that local residents cannot find affordable long-term lets in Portugal. The rental housing market has been in crisis for decades. Unbalanced legislation, over-regulation and the ongoing negative effects of rent control have poisoned pricing and housing availability.
Repeated attempts at reforms have failed to address effectively the underlying problems. While Local Lodging may siphon off some flats from the resident rental market, it is an exaggeration to lay full blame on Local Lodging for the transformation occurring in historic neighbourhoods.
Cost of money
The disparity between yields from these two activities exacerbates the dichotomy. The cost of money when first acquiring a property is one of the key elements of this difference.
When an owner needs a mortgage, the lion’s share of long-term rental income goes to pay back the bank. For example, a landlord puts down €25,000 and borrows €125,000 over 20 years to buy an apartment. The monthly payment is €500, equal to the going rent of a modest two-bedroom flat in Lisbon. That leaves nothing for taxes (28%) or for maintenance and repairs. There is no profit. In other words, only those who own outright beforehand may eke out a small gain. On the other hand, with Local Lodging, the income on the same flat doubles or trebles and the business model becomes viable.
The key point is not that Local Lodging income is too high. In Portugal, rents tend to be too low and fail to reflect the real cost of money – even in a historically low interest rate environment. In any economy, where cheap labour is one of the few factors contributing towards competitiveness in a globalised market, this impasse is inescapable.
Conclusion
Change always creates discomfort and shakes up the status quo. It is beyond a shadow of a doubt that the start-ups of the peer-to-peer economy are a challenge for tax-collecting governments and established businesses alike.
Suddenly, the “new kid on the block” is operating under a different set of rules or no rules at all!
However, with millions of new consumers adhering enthusiastically to innovative offerings, the basic principal of supply and demand cannot be ignored. While bureaucrats may be tempted to regulate their way into a comfort zone, a country dependent on all forms of tourism like Portugal cannot afford rash moves.
Tourism is one of the few economic areas of proven results with continuing promise for further growth.Creative solutions, coupled with a healthy dose of patience and forbearance, can surely meet the legitimate needs of most, if not all, concerned without over-regulation and prohibitions.
This is the second of a two-part series on “Why a ban on Local Lodging wouldn’t work”.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.
www.eurofinesco.com
