Residential construction has been slowing since late 2025, and the indicators for the first months of this year confirm the bleakest scenario.
According to construction sector activity figures compiled by the Association of Civil Construction and Public Works Industries (AICCOPN), the first two months of 2026 saw 3075 licences issued nationwide for residential construction and refurbishment schemes. That represents a 15,9% drop compared with the same period last year. The cooling trend is also clear in the number of newly licensed homes, down 13,3% to 6230 dwellings, versus 7184 units in the year-on-year comparison.
Licensing falls as residential activity cools
The reduction in licences for residential build and refurbishment projects is being mirrored by other measures that point to a broader decline in construction activity.
AICCOPN also reports that, for refurbishment works licensing specifically, there was “a year-on-year decrease of 20,1% up to February 2026”.
The association further notes that licensing statistics cover only operations subject to prior municipal oversight, meaning they do not represent the full volume of refurbishment interventions actually under way. In the first two months of 2026, cement consumption fell 9,8% year on year, reaching 561 thousand tonnes.
VAT at 6% leaves new-build projects on hold
One of the main factors among several contributing to the downturn is the pause affecting certain projects: some developers are still waiting for clarification on the rules for applying VAT at 6% and on the licensing amendments they must submit to local councils in order to qualify under the new framework. It should be noted that the standard VAT rate currently applied to construction is 23%.
As regards the legislation on VAT at 6% for construction and affordable renting, the Government presented the measures last October and approved them in the Council of Ministers on 27 March, yet the decree is still not in force. When contacted by Expresso, neither the Government nor the Office of the President of the Republic provided an explanation for the delay.
Promoters are waiting for clarification of the legislation on VAT at 6%
Telmo Azevedo, who leads at the consultancy JLL, underlines that from the announcement of the VAT reduction through to parliamentary debate, an expectation built up around how the measure would work in practice-its application boundaries, eligibility criteria and possible retroactivity. He adds that, even though the implementing decree-law has not yet been published, “we are already seeing developers structuring new-build projects based on the known rules”. As a result, “several projects have been left on hold, awaiting confirmation of eligibility, which has translated into a visible reduction in the submission of new licensing applications at the start of 2026”.
Azevedo warns of the paradox now emerging: “a measure designed to speed up projects and enable new housing supply at more affordable prices is, because its details remain undefined, temporarily contributing to a pullback in construction activity”.
Manuel Maria Gonçalves, executive director of APPII, the association representing property developers and investors, also stresses the urgency of publishing the decree to remove uncertainty and finally allow the market to assess the real impact of the measure on increasing supply-and, as expected, on lowering final prices for buyers of owner-occupied primary residences.
He cautions that the doubts created in the market will only be resolved once the legislation is published in full. “This situation is creating instability in the market and is not helping the sector at all,” he says.
Urban rehabilitation: ARU/ORU VAT disputes and added bills
At the same time, in the case of refurbishing buildings in city centres, the slowdown is mainly linked to the mistrust triggered after the Supreme Administrative Court (STA) and the Constitutional Court (TC) sided with the Tax Authority in cases concerning which VAT rate should apply to projects that, while located in Urban Rehabilitation Areas (ARU), do not have an approved Urban Rehabilitation Operation (ORU). That led the Tax and Customs Authority (AT) to demand VAT at 23%, rather than 6%, which had been the initial interpretation.
This has alarmed market professionals, who believe it will further worsen the shortage of homes available and make 2026 “another lost year”-even though they agree that cutting VAT on construction could be a positive step towards easing today’s high build costs.
In the case of the VAT regime applied to refurbishment projects in city centres-many of which have already been built and sold-additional assessment bills have reached contractors and property developers in recent months.
In one example cited to Expresso, a developer who delivered a residential scheme of 40 units in Greater Porto-sold at mid-market prices (T1 between €160 and €170 thousand euros /T2 between €220 and €230 mil) and already completed with deeds-having invested €7 million, received a notice to pay €1,1 million relating to the remaining 17% VAT.
Regarding the application of VAT at 23% on refurbishment schemes in ARU zones, APPII’s director highlights efforts to resolve a problem affecting many developers. “Together with the Government, local authorities and AICCOPN, we are studying a solution and, for that reason, we have commissioned-alongside the consultancy Ernst & Young-a study we intend to present shortly,” he says. Many of these cases are being contested in arbitration courts.
In reply to questions sent by Expresso, Lisbon City Council’s communications department notes that the latest data show a drop in activity across the sector, both in new construction and in refurbishment. It adds that licensing processes “do not allow us to determine, with precision, whether projects are intended to meet the criteria associated with applying the reduced VAT rate”.
Market players say the legal uncertainty makes 2026 “another lost year”
The council also says that, at present, it “does not have information that enables it to assess or monitor, directly and reliably, whether contracts comply with the requirements defined by the AT”.
It further argues that “being in an urban rehabilitation area does not, by itself, guarantee the application of reduced VAT, nor does it allow the impact of that measure on prices, rents or how the properties are used to be assessed”.
Meanwhile, José de Matos, an adviser to the board of the Portuguese Association of Construction Materials Merchants (APCMC), says that “waiting for the VAT at 6% legislation has a strong impact on sector activity”, as does the mistrust surrounding refurbishment after the AT began its first collection processes for unpaid VAT. “This situation has affected many businesses, created mistrust and is clogging up refurbishment,” he says.
According to APCMC’s Business Outlook Survey, during the first quarter “there was an almost stagnation in sector sales, which came in clearly below expectations”, even though the previous quarter’s forecasts (from the last quarter of 2025) already pointed to a slower pace of growth.
De Matos adds that it was retail companies which-having anticipated a significant rise in sales over this period-ended up posting negative performance.
It is worth noting that construction materials retailers, which sell a wide range of essential products for building work, renovations and DIY, are also directly hit by the slowdown in construction activity. In his view, this was compounded by “the difficulties experienced in the Centre of the country” following storms in the first two months of the year.
Alongside weaker sales, APCMC also warns that “selling prices showed a clear upward trend, as is usual in the first quarter of the year, but with greater intensity, which will be due to the rise in energy prices (because of the war in the Middle East)”.
In de Matos’s view, if the current situation in the Persian Gulf persists, the knock-on effect on construction materials prices will be “significant, especially from June and July”, and if the increase reaches 10%, “it will have an impact on the final price of construction”.
The drop in licence numbers also points to weaker investment, with causes that may also include labour shortages and higher labour costs-particularly pronounced in refurbishment works compared with new builds-alongside the “prohibitive” prices that properties in need of refurbishment have reached in urban centres.
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