“The Market Seen from the Street”: The Real Estate Licensing Process in Portugal
Sometimes we have to look at things from a different perspective, with an "independent perspective." This helps us understand processes, discover flaws, and suggest solutions.
Despite the "real estate market's apathy in the month of August," a consulting process in which I have been involved "forced me" to reflect on the real estate project licensing process in Portugal. Usually, when we approach the topic, reactions are "automatically negative," and the process is a "Sharp Pain" in the real estate development cycle.
Applicants blame the inertia of the licensing entities' system, and the licensing entities blame the applicants and the poor process instructions. Same old story. Lots of controversy and few solutions. Everyone looks out for their own interests, and no one understands each other.
But is it easy for the parties to understand each other? It doesn't seem so.
Why? Because the involved parties always assume a divergent stance. Problems are pointed out, but solutions are not suggested.
Will the simplification proposals presented in the "Mais Habitação Program" solve the "existing issues"? I confess that I don't believe so. However, the attempt is commendable. We need to start somewhere, though history tells us that too much simplification leads to significant complications.
Let's now analyze the Licensing Process in a very simplified way. For that, I've defined four distinct phases where we clearly distinguish "Before Construction" and "After Construction."
We're well aware that during the course of construction, there may be some procedures related to changes to the approved project. This is a sensitive matter in Phase 4, obtaining the Utilization License. Sometimes, changes resulting from the actual construction process are not accepted in the final stages (even if they don't alter the building's structure, typologies, areas, morphology, etc.).
Phase 1) Use, Volume, Architecture Approval
PIP (Prior Information Request) - This type of project is not binding. It can be more or less developed (more detailed in terms of drawing specifications and design), and its main goal is to validate a certain volume and use for a plot of land or building. When the project's level of specificity is higher, it can allow for a lower degree of complexity in the approval of the Architectural Project. Time required for approval, 3 to 9 months.
Prior Communication - This process allows for simplification of the Construction Permit application process, optimizing the required time. It's not applicable for all types of urban licensing processes. Usually, when we have Urbanization/Plotting processes that were previously approved and validated, and we want to obtain the Construction Permit for a specific "Plot," Prior Communication is the solution. On the other hand, for existing buildings where we don't intend to increase volume or modify the exterior façade morphology but want to change the use (e.g., Offices to Aparthotel) and the internal layout, the Prior Communication format may also apply. Time required for approval, 3 to 6 months.
Architectural Project - Typically, this is the most complex approval process with Municipalities. Depending on locations, project specificities, and asset classes, it may require evaluation from several external entities to the Municipality. This is one of the reasons that often contributes to the lengthy approval cycle. Time required for approval, 9 to 12 months.
Phase 2) Validation of Specialty Projects |Engineering Projects
Specialty Projects - Specialty projects require "validation" from the Municipalities. There are various types of specialty projects that can be part of the Project approval process, depending on their characteristics.
Stability/Structures
Water and Sewage
Gas Installation
Energy/Electricity
Telecommunications
Fire Safety Systems
Elevators and other special equipment
Heating, Ventilation, and Air Conditioning
Others
Time required for validation, 3 to 6 months.
Phase 3) Obtaining the Construction Permit
Approval of the Submitted Project - This is the validation/approval that allows for the development and execution of the approved project, obtained after the approval of the Architectural Project and validation of the Specialty Projects. The document specifies the fees to be paid to the Municipality related to Urban Infrastructure. Time required for approval, 6 to 18 months. Depends on the project's complexity level.
Construction Permit - Required permission to start construction work, which can be requested after project approval. The validation process with the municipality "requires" the existence of a Construction Permit from the company responsible for the execution of the work. The purpose of this Construction Permit is to demonstrate that the company has the technical knowledge and qualifications to carry out the licensed project and the planned work. Usually, the Developer/Owner submits the process of obtaining the Construction Permit after choosing the General Contractor and signing the Construction Contract. It's possible for the Developer/Owner to hold the Permit, no longer depending on third parties to complete the process with the municipality. All urban licensing fees should be settled to obtain the Construction Permit. Time required for validation, 1 to 3 months.
OVP (Street Occupation Permit) - Permission that allows temporary use of the public street considering the constraints and needs of the construction work. It can be requested in parallel with the Construction Permit. This permit aims to ensure that temporary occupation is carried out safely, organized, and in accordance with local regulations, to avoid unnecessary disruptions to the public and to maintain the integrity and functionality of public areas. Time required for validation, 1 to 3 months.
Phase 4) Completion of construction work and obtaining the usage license - Typically, when we receive the "Final Approval," the Approval of the submitted Project (described in Phase 3), in addition to specifying the urban licensing fees to be paid, also outlines the documents and certifications necessary to apply for the Usage License after completing the construction work. Certifications and documentation can vary depending on the project's characteristics, asset class, and building use. Time required for approval, 3 to 6 months.
As I mentioned above, after completing construction work, there's a need to certify the building, with various types of certification. Below, I indicate some of the most common ones.
Water and Sewage - There's a need to certify the executed work with the competent authorities and request connection to public networks. The time required to complete the process can range from 2 to 3 months, from the moment we request supervision/inspection of the work executed to the moment the specialties are connected to the public network and ready for use.
Electricity and Telecommunications - Telecommunications certification might be simpler than electrical system certification. The first phase of the process only requires supervision/inspection of the work executed. If the executed work is in accordance with the approved plans, the process is simple and might take about a month to complete. The second phase of the process, which involves connecting the building to the operators' system, can be a bit "more confusing," and the time required for its completion can reach 3 months.
Gas System - Gas System certification requires supervision/inspection of the work executed. The second phase of the process, involving connection to the contracted operator's system, will require certification considering its specificity. The time required to complete this process can reach 3 months.
Energy Certification and Acoustic Certification - Simple processes that require 2 to 4 weeks to complete, depending on the project's complexity level.
Fire Safety Systems - A simple certification process that might require a higher level of specificity depending on the asset class and associated risks of its use.
Elevators and Other Special Equipment - A simple certification process that might require a higher level of specificity depending on the asset class and associated risks of its use.
Analyzing the presented licensing process phases, we quickly realize that time is a variable with significant uncertainty. It depends on the project's complexity level, the Municipality and its process, the need to consult external entities, the assessment of Technicians, the applicant's strategy, etc. The level of subjectivity is high, and the system is highly bureaucratic and complex.
Between Phase 1 and Phase 3, in other words, between submitting a project for license and obtaining authorization to start work, 7 to 19 months can elapse. Note that I'm presenting average times.
Phase 4, Post-Construction, has less associated bureaucracy, and the average time to certify the property and obtain a usage license varies from 3 to 6 months (considering that some certifications may take place while certain finishing works are being completed).
With an average construction period of 18 to 20 months (for projects over 2000 square meters), we can affirm that often (on average), over 50% of the real estate development cycle for a property/development is spent on "bureaucracy and paperwork."
Given the evolution of the construction sector with new methods aiming to improve construction times through process "industrialization," if we don't improve the licensing process and its timelines, bureaucracy will become even more significant in the real estate development cycle.
In a "faster-paced economy with increasingly shorter cycles," reducing the cycle of "bureaucracy" is essential because the consequences are highly negative.
And what are the consequences? They can range from project delays and their impact on conceived Business Plans to the insolvency of individuals/companies unable to withstand extended cycles without revenue and with significant exposure to market fluctuations (inflation, interest rates, etc.). We must not forget that time always has associated costs.
One thing is certain, unpredictability deters investment. Risk diminishes the value of development assets, especially in uncertain economic cycles.
What can we do to improve the licensing cycle? The digitization of the process and the inclusion of Building Information Modeling (BIM) promise a higher level of transparency, productivity, and process monitoring capability. Nonetheless, a profound reform of rules and urban regulations will be necessary. We need to simplify bureaucracy and update the licensing process and its fundamentals for today's world. The needs of people, the environment, and the market should take priority in the revision.
On the other hand, I believe that the digitalization and mechanization that these systems bring are beneficial for productivity and efficiency. However, attention must be paid to the subjectivity level of property licensing processes. Each case is unique. If we build a system based on an assumption that everything goes according to the norm, we're creating a problem. In my opinion, that's where the main problem lies.
We can't create systems based on assumptions that don't "allow" for errors and that everything proceeds according to the norm. Errors are inevitable. We need to create conditions to address errors, suggest solutions in a timely, simple, and assertive manner.
When a certain licensing/urban validation process is initiated, if errors exist, the technician(s) reviewing the processes point out the problems but often don't suggest solutions. This situation leads to more low-productivity iterations between the involved parties (Applicant and Licensing Entities), often without conclusions, increasing the time needed to respond and conclude the processes.
In short, if everything goes well, the Licensing Process tends to be faster and more expedient. If there's an applicant error, however "small," the time to conclude the process can double. Thus, the problem seems obvious. The system isn't well thought out. The process isn't properly conceived.
It's neither the Technicians' nor the Applicants' fault, it's the lack of suitability of the system and the process that generates "distrust" between the parties. Human error is inevitable. If we want to eliminate human error, we have to put decisions in the hands of Artificial Intelligence. Either way, evolution doesn't occur without error.
As we can't eliminate the "process error," and as I continue to believe much more in human intelligence than in artificial intelligence, we need to think about the process and its systematization with this assumption, creating conditions to address errors without getting into a dead-end labyrinth that jeopardizes the viability of projects and the solvency of individuals and companies venturing into real estate project creation and development.
See you soon,
André Casaca
