Sub-tropical splendour with a cool price tag

Madeira's reputation as an exotic destination for wealthy retirees has been turned on its head by a clutch of new developments, says Chiara Cavaglieri

Portugal's economic problems might be enough to put many overseas property buyers off, but the Portuguese island of Madeira is still proving popular with home-seekers from all over Europe.

Wealthy retirees have long had a love affair with the place, but now budget airlines are providing affordable flights, London is just three hours away, its attractions are being discovered by a new generation of visitors.

"For many years Madeira was considered a popular destination for the 'blue-rinse brigade', largely due to the year-round sub-tropical climate, and they tended to holiday in the capital city of Funchal.

"However, a concerted effort to attract younger couples and families has resulted in new facilities including golf courses, marinas, entertainment parks and even a man-made beach," says Connie Vitto, of Quadrant Overseas Property.

In February last year, Madeira hit the headlines after severe floods devastated the south of the island but it didn't taken long to pick itself up and entice visitors back. Although famed for its wine, cake, embroidery and footballer Cristiano Ronaldo, the island is still something of a well-kept secret and with 67 per cent of it made up of protected land and forests, it isn't over-developed.

The developments that are there tend to be high-end villas which boast some of the island's most exquisite views. The Palheiro Estate, for instance, which is located just outside Funchal, has been owned by the British Blandy family since 1885, and provides the perfect example of what Madeira has to offer: stunning gardens which attract over 40,000 visitors a year, a luxurious spa and an 18-hole golf course voted by Golf World magazine as one of the top 100 golf courses in Europe.

Property prices at Palheiro Village, part of the estate, range from €295,000 (£260,000) for a large one-bedroom apartment and €395,000 for two bedrooms, up to €595,000 for a three-bedroom villa and €1.65m for a four-bedroom villa with a garden and a pool.

The village operates a full management service but this doesn't come cheap; the annual infrastructure and basic service charge starts from €2,492 for one-bedroom apartments and rises to €8,993 for the top-end villas.

"The property market in Madeira is very much a niche market compared to the mainland of Portugal, most particularly in our segment of the market – that of luxury integrated resort developments. Whereas in the Algarve (or Silver coast), for example, there are a larger number of similar developments, here on Madeira, Palheiro Village is the only completed resort development with this type of property on offer," says Palheiro Real Estate sales manager, Anne Marchington.

The good news for anyone looking for a holiday home in Madeira is that, unlike many other areas of Europe, the tourist season lasts all year round. If you wanted to rent out your Palheiro Village home, typical rental values on a two-bedroom apartment would be around €900 per week during the standard season, €1,000 in July and August and €1,250 during the peak season over Christmas and New Year.

Ms Marchington says that a fairly conservative estimate of 24 rental weeks could yield around €15,810 once you've taken 15 per cent off to cover the rental commission (unless you decide to rent it out yourself) and another 15 per cent for the rental services package, which pays for cleaning, laundry and utility costs. Property running costs of around €6,950, which includes local property tax, the service charge and home insurance, will bring the margin down to €8,860 – equating to a 2 per cent return on a purchase price of €430,000.

"Some purchasers who originally did not think of renting out now have decided to do so, as their own situation may have changed, they are unable to spend as much time as they would have liked in the property, or feel that the property is better looked after when used rather than sitting here empty," she says.

Outside of the luxury developments, buyers tend to concentrate on the busy tourist favourite Funchal, where prices range from €80,000 for a brand new one-bed flat without facilities. If you want a pool and garden you could pay from around €125,000 and €150,000 for a two-bedroom flat.

However, experts say that new areas are opening up in the sunny south- west of the island, with towns such as Ribeira Brava, Ponta do Sol and Calheta being of particular note. Price-wise, the lay of the land means you can expect a sea view without the premium you might pay elsewhere in Portugal.

"Many of the properties are built on inclines due to the dramatic mountainous landscape, which means that the average villa or apartment has superb views of the coast, sea or Funchal Bay.

"But despite this, prices still tend to be lower than the mainland. As with most European countries, the recession has had an affect on prices and stock but they have definitely not crashed, possibly because Madeira was not as reliant on the British market as the Algarve," says Ms Vitto.

When it comes to raising finance, seek independent legal advice from a local solicitor before signing anything, so that you know exactly what your commitment is. Buyers are obliged to pay fees of up to 8 per cent of the purchase price, which includes IMT, a property transfer tax, the top rate of which is 6 per cent, notary public fees, a land registry fee of a few hundred euros and legal fees, which are normally in the range of between 1 and 1.5 per cent of the purchase and sale value. Ongoing costs include an annual property tax of between 0.2 and 0.8 per cent and capital gains tax for non-residents is 25 per cent.

"The easiest way of buying in Madeira is for cash, with many Britons releasing equity from their UK home to buy on the island. This is straightforward if you can prove that you can afford the mortgage and have enough equity in your home. The downside is that you will raise the funds in sterling and then have to convert them into euros, the local currency, so this can be expensive because of the current exchange rate," says Melanie Bien, director of independent mortgage broker Private Finance.

Alternatively, says Ms Bien, you can take out a euro mortgage from a Portuguese lender but be prepared to put down a large deposit.

"Maximum loan-to-values tend to be lower than in the UK so you will need at least 25 per cent of the purchase price to put down, plus you must also prove that you can afford the repayments, so your existing financial commitments will be taken into account by the lender," she says.