A flat let for €900 a month may have a different market value from a similar property available for immediate occupation. The difference depends on the agreed rent, its relationship with market rent and the conditions under which the owner can increase income or regain possession. A sitting tenant does not automatically reduce a property's value.
Lease terms determine income and availability
The valuation starts with the lease, amendments and relevant notices. The valuer establishes whether the use is residential or commercial, when the agreement began, its remaining term, renewal provisions, guarantees and rent review arrangements. The stated expiry date is not necessarily the date on which vacant possession will become available.
In Portugal, the Civil Code and the New Urban Lease Regime, approved by Law No. 6/2006, as amended and applicable, are central references. Older agreements may fall under transitional rules and specific tenant protections. A sale generally does not terminate the tenancy; any statutory pre-emption rights must also be checked. Uncertainty over termination or the applicable regime requires legal advice.
Passing rent compared with market rent
Passing rent is the rent currently payable under the lease. Market rent is the amount that could be agreed at the valuation date for comparable premises on similar lease terms. In Funchal, location, parking, condition and energy performance can all explain significant differences.
Comparisons should prioritise completed lettings or verifiable market evidence. Asking rents are useful indicators, but not proof of agreed rents. An above-market rent does not necessarily increase value: the tenant's ability to pay, the duration of that income and the likelihood of default also matter.
Turning rental income into capital value
The income approach estimates the cash flows available to the owner. Non-recoverable costs are deducted from revenue, including municipal property tax (IMI), insurance, owner-funded service charges and maintenance. Expected collection losses and periods without rental income must also be considered.
Direct capitalisation can be suitable for stabilised income. Where rent changes or lease events materially affect returns, discounted cash flow analysis can model individual periods and a terminal value. Market-derived rates must be consistent with the cash flows and avoid double-counting risk. EVS and IVS provide frameworks for defining assumptions and supporting the valuation, where applicable.
Quantifying the remaining lease term
If passing rent is €900 and market rent is €1,100 a month, the annual shortfall is €2,400. Assuming that difference remains constant for three years and applying a 5% annual discount rate, its present value is approximately €6,500, before differences in costs and other risks.
This illustrates only the effect of below-market rent. It neither establishes the property's total value nor assumes that vacant possession will be possible after three years. That assumption needs contractual and legal support.
Evidence needed for a defensible valuation
Alongside the lease, obtain rent receipts, payment records, expenditure details, property records and evidence of condition and lawful use. An inspection and comparable market evidence complete the assessment. The report should distinguish the value subject to the existing tenancy from any vacant-possession scenario, stating the valuation date, limitations and assumptions used.