Portugal Golden Visa Funds vs Real Estate
In this post, we help you decide if you should you invest in Portugal Golden Visa Funds or Real Estate as part of the Golden visa program in Portugal.
While the Golden visa program was launched by Portugal in 2012, the investment fund route was only introduced through an amendment in the relevant law in 2017. Interestingly, real estate still remains the most preferred route for investors applying to the golden visa program, with close to 91% of the total investment in 2020 and 1,094 ARI applicants coming through the real estate investment route. Only 2.6% of the investments made in 2020 or 48 ARI applicants preferred the investment fund route.
For context, a total of 9,834 investment residency permits (ARI) and 16,698 residency permits for dependent family members have been issued by Portugal from 2012 to June 2021.
Portugal Golden Visa Funds deserve more attention
While the real estate investment route is most popular among investor community, we believe that the investment fund option deserves more attention. We sum up some of the advantages of investment funds route:
1. Professional manager: A fund is run by a professional manager, who is experienced and understands the local market much better than foreigners.
2. Diversification: By investing in funds, the investor’s exposure is diversified amongst various investee companies or real estate projects rather than being exposed to only 1 asset.
3. Regulation: Funds are regulated by Portuguese securities market regulator, known as CMVM (Comissão do Mercado de Valores Mobiliários)
4. Auditor: Fund accounts are audited by reputed professional auditors, adding another layer of security
5. Lower taxes: Acquiring a real estate property in Portugal comes with a property transfer tax (in the range of 5-8%) + stamp duty (0.8%) and other costs. Additionally, one may have to pay municipal taxes every year (0.3 – 0.8%) and income tax of 28% on rental income from the property. There are no taxes on investment in fund units and depending on the way the fund is structured, as well as tax residency, there may be no withholding taxes on dividend income received from the fund.
On the flip side, the investment fund route has following risks
1. Lack of secondary market liquidity: A fund life cycle typically has following phases
Subscription period: Fund accepts money from investors
Investment period: Fund deploys money raised from investors
Holding period: Fund holds and is expected to realize appreciation of underlying investments
Divestment period: Fund exits its investments and returns moneys to the investors
All Golden visa investments, including real estate, have to be held, at a minimum, for 5 years to be eligible for residence or citizenship under the Golden visa program. After 5 years, investors are permitted to exit their fund investments by selling their units to other investors, without having to wait for the fund to divest the assets. However, there is no active secondary market for fund units yet and hence investor may not realize fair value of their investments or timely exit if they opt for a secondary exit via sale of units. Their best bet remains waiting for the fund to divest the assets and return the moneys.
2. Lack of clarity around fund exit: Typically, fund will have a divestment period ranging from 1 to 3 years, during which it is expected to exit the investments and return the moneys to investors. Given the long divestment period, it is difficult to predict the exact time when the original investment will be returned to investors. If the fund is unable to exit the investments during this pre-defined divestment period, then, the fund may also extend the divestment period (if the constitutional documents so permit) by a couple of years, subject to approval of the fund investors.
Why real estate?
Real estate remains an attractive option due to following reasons:
1. Tangible asset: Investment in funds gives you participatory units, while real estate investment gives you a tangible asset that may be rented or used for your own residence during and after the program.
2. Better control over the asset: As a real estate investor, you have full control over the asset. You can decide whether you wish to rent, to whom you want to rent and the terms. Though, more often than not, real estate investors under this program prefer investing in a commercial asset, such as a hotel property or serviced apartments or retail blocks which are managed and rented by the operator, paying a pre-determined rental/ yield to the investor.
3. Buyback schemes: A lot of golden visa project developers offer guaranteed returns and/ or guaranteed buy backs giving visibility on expected return on investment and timing of exit. We recommend that all guaranteed schemes be carefully examined. We have tie ups with some developers that offer these schemes. Do get in touch with us to understand your options and the risks in these buyback schemes.
4. Better liquidity than fund units: A real estate project, if carefully chosen, can have better liquidity compared to investment fund units. Also, as an investor, you will have the right to decide when you want to exit the investment (after holding period of 5 years) as opposed to waiting for the fund manager to provide you an exit.
Click here to read about Portugal’s Golden Visa program