Investing €500,000 into residential real estate in Portugal is still a good option, which is why it receives about 90% of golden visa applications. But it’s no longer easy to find good investments, due to both increasing demand and prices.
Until now, the €350.000 investment route was only limited to certain areas and old buildings, representing less than 3% of overall applications. It’s complicated to go through this route as it requires finding investments in old apartments in need of restauration, or in buildings in certain unpopulated areas where there is almost no demand or liquidity. It’s not impossible to make a good investment in this manner, but doing so at scale won’t be easy.
The next big growth area is the €350,000 route through regulated private equity funds. That is where the market will grow in the next few years. Due to the Portuguese economy’s positive upward trend, funds are in a great position to capture the incoming upside from the rapidly improving financial situation. With this in mind, the equity fund investment option is very competitive from the perspective of the investors, mainly due to the factors listed below.
- Funds are regulated by the CMVM (Portuguese Capital Markets Board), managed, audited, and valued by independent and licensed companies. This provides an additional layer of security and transparency to the investor.
- It’s the easiest and simplest way, as it’s a managed product with absolutely no burden on the investor.
- There is no transaction cost for buying and selling, as is the norm with real estate which has multiple additional costs such as title transfer (IMT), stamp duty, brokerage, furniture package, and lawyer’s fees increasing the investment cost by up to 20%.
- Another round of efficiency is the tax exemption of regulated funds; 0% tax on dividends and capital gain from the funds, a game changer when compared to the real estate option, which is taxed at around 28% of the total rental revenue and capital gains, hurting ROI.
- With a good investment management team in charge of a fund, the opportunities of the market otherwise inaccessible to the overseas investor are more easily captured.
- The safety derived from owning a title deed is replicated in private equity funds investing in companies developing real estate or tourism assets. Funds structured around this premise are considerably stronger in terms of downside protection and enjoy the privilege of investing in larger development and commercial assets with higher income and upside potential.
- Efficient liquidation. As the entire liquidation of the assets and the investment is managed by the asset managers and the investment management team, the investor won’t have to go through the hassle of selling real estate, which, sometimes, is priced speculatively.
Immigration advisors, agents, and real estate brokers are the main driving factor behind residency or citizenship inflows and outflows. Only when advisors from all around the world start understanding and including eligible fund investments in their portfolio will the true potential of this route for the Portuguese Golden Visa become apparent.
- The first fund investors already got their Golden Visas approved and the proof of concept is already there. This is by far the most important deciding factor for a broker and the fact that this hurdle is out of the way means brokers are warming up to it quickly.
- The investors have adapted quickly, but the immigration agents and investment brokers are still lagging behind as they have developed a comfort zone of dealing with the classic 500k real estate acquisition option. The market needs to be educated and we are doing our best to freely train the agents on what to look for when they look for eligible investments for their investors.
- The decreasing popularity of the EB-5 program creates an out-of-market growth zone for the Portuguese funds as they operate with a very similar mechanism, both with respect to the investment option and with respect to the way residency and citizenship are granted through the investment. The EB-5 agents who are looking to diversify and use their previously accumulated know-how are in a uniquely advantageous position with respect to this route.
For both the investors and advisors who want to discover the fund investment world, we have prepared a small preliminary checklist. Of course, we always recommend getting advice from experts but this checklist should help to choose the right product for both the meticulous investors and diligent advisors.
Fund Investment Checklist:
- Is the fund managed by investment managers/advisors who have a proven track record?
- What is the fund’s underlying investments, risky or not? How much risk appetite you have?
- Does the fund have a diversified portfolio providing an additional layer of risk management?
- What is the exit strategy of the fund and how realistic is it?
- Does the fund strategy take into account possible economic downturns and does it have contingencies for such cases?
- Is there an alignment of interest between investment managers/advisors and fund investors?
- Is the fund audited by a reputable audit company?
- Have there been Golden Visa approvals for the current fund or for a previous fund overseen by the same team?
About the author:
Hakan Kodal is the Chairman of Optylon Krea and Trustee of Urban Land Institute. The company was formed between Krea Real Estate and Optylon Capital in order to develop a pan-Mediterranean real estate and investment management presence. The combined track record of the partnership exceeds €1.5 Billion investments in Portugal, Turkey, and Romania.
Optylon Krea has already acted as advisor or manager in four funds in Portugal and Turkey and has solid working experience with institutional investors as well as family offices and HNWIs. The current gross development value of €350 Million in Portugal reached through the development of mix used prime assets is a testament to the alliance’s growth potential.
To learn more about the Portugal Golden Visa’s fund investment option, please visit Optylon Krea’s website.
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