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Revitalizing Neglected Buildings with Tax Incentives

Walking through downtown Lisbon one of the most notable characteristics, in addition to the historic charm and culture, is the stock of neglected and dilapidated buildings. These buildings are unsightly, susceptible to fires and have potential use for illicit activities and squatters. The majority of these buildings are located in the historic central area of the city. Although using these buildings as canvases for urban art has led to the praise of Lisbon as an artistic hub, in general proximity to neglected and unsightly buildings have a negative connotation. Policies to address the climbing stock of neglected housing include rehabilitation and maintenance tax credits to stimulate the upkeep of building quality.

Portugal’s restrictive and historic rent control laws, which have in general been criticized, favour the tenant and lead to situations of frozen rental income for landlords without enough to maintain their properties. Without legal means to raise the rent, landlords have no incentive to invest in the quality of their assets, and buildings are left to become neglected and abandoned. There is a strong positive correlation between the percentage of residents in a city block paying under €50 a month (a measure capturing rent control) and the decreasing quality of building stock for Portugal’s two largest urban areas (Lisbon and Porto) in 2011.

Rent Control and Building Quality (Lisbon, Porto Census 2011)

Rent

Source: INE Census 2011

New reforms are being implemented and strict rental laws are beginning to relax with the introduction of austerity measures. Causational arguments between rent control and building quality aside, these abandoned buildings are now – as we move from times of crisis and in a more flexible market, a prime item for investors. With current owners unable to pay for repairs and maintenance, locals and international firms are making use of tax credits and incentives which are being provided by local authorities to incentivise the redevelopment of the aging building stock. Such neglected properties are being converted to hotels, cafes or restaurants to start earning rent.

Additional housing dynamics exist for the renovation of abandoned buildings which are clustered in the historic downtown core and located in historically protected zones of the city, which have unique maintenance and rehabilitation requirements to maintain the historic ambiance of the area. Two mechanisms may influence properties located in protected zones, either a direct heritage effect where investors gain benefits from owning heritage properties or alternatively where the strict regulations and administrative burdens have a negative impact on dwellings in these zones. It is estimated that being located in a protected zone of Lisbon actually has a negative impact, decreasing housing prices in the order of 4%.[1]

Current tax incentive policies are not heterogeneous however when considering the impact of neglected buildings located inside and outside of historically protected zone, and thus if there are negative housing effects due to strict renovation mandates in protected areas then a different tax incentive scheme may be required to incentivise the rehabilitation of dilapidated housing stock in historic areas. The underlying fundamental however is to provide the owners of buildings with the right incentives to invest in keeping the building quality at some minimal level or in line with official heritage designations.

Jacob Macdonald

[1] Authors own calculation.

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Author: studentnovasbe

Master student in Nova Sbe

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