Investing in a Fund in Portugal: Everything You Need to Know

Investing in a Fund in Portugal: Everything You Need to Know

Anastasia Zapevalova
3 March 2023

Investing in funds – alongside real estate investment – is one of the most popular routes for investors who want to obtain a Portuguese residence permit via the Golden Visa program or just to make a profit. You need to invest at least €500,000 in funds to qualify for a Golden Visa. The typical fund has an investment term of 6-8 years, which covers the Golden Visa application period and the minimum five-year residency term.

In this interview, the founder of Migronis, Anatoly Letaev, and an expert on Golden Visa programs, Ilana van Huyssteen-Meyer, both discuss and answer the most popular and tricky questions on how to invest in funds in Portugal. Even with the Golden Visa program being scrapped soon, it remains a profitable and promising investment, especially in certain regions. From this interview you will find out:

  • What are the pros and cons of investing in funds versus investing in real estate
  • What yields you can expect
  • How to minimize your risks while investing in funds
  • How to choose the best fund for your needs

… and other useful information that you need to know before making your investment decision.

The first step for investors is choosing whether to invest in real estate or a private equity or venture capital fund. What are the pros and cons of these two options regarding taxation and risks?

Anatoly: With direct investment in real estate, there is a tax on rent from renting out the property and a tax on the capital gain if you resell it later. These taxes are 28% and consume a large part of the total return on investment.

Non-residents who choose to invest in a fund do not pay tax in Portugal on the yield received from these investments. However, they have to pay this tax in the country of their actual tax residency. If a person lives in Portugal, the tax on income from fund investments will be 10%, which is very low.

In the case of investing in a fund, it may feel a little riskier because someone else manages your capital. However, if you invest in property and don’t live in Portugal, you will still have to look for a management company to rent out your property. In either case, there is a catch. At least by investing in a fund, you can be sure that its team is personally interested in making you a profit. If you make money, they make money too.

At the same time, you need to understand that a stable income from real estate in the long term is also not guaranteed since the economic situation may change, and the real estate market may fall.

If you compare investing in real estate with investing in a fund in terms of revenue, which is more profitable in the long run?

Anatoly: Let’s look at how renting real estate in Portugal works for an investor. Suppose you buy an apartment in Cascais for €600,000, rent it out for €2,000 per month and pay 28% tax on that income. As the landlord, you will have to pay for many household maintenance expenses and may have downtimes when the apartment will not give you any profit but will require maintenance instead. By taking into account management costs, taxes, necessary repairs, and brokerage fees, your apartment will pay for itself in 25-30 years without considering the growth in the value of the property itself.

By investing in the same real estate market through a fund, you can estimate an average of 7-10% annual returns on average. Funds enter the market with significant capital and can invest in real estate at a lower cost and manage them efficiently, so the final return for the investor is higher.

A good example is one of the approved funds that invest in property development by the top developers in Portugal. Such a fund gets access to the development of properties at a very early stage, and because they often buy in bulk (a few units), their acquisition cost is lower, and they get to cherry-pick the best-located units. This advantage puts them in a favorable position to achieve higher rental returns, making the property easier to sell at the end of the term. On the other hand, a typical retail investor that buys the property directly will have limited access to the project and pay a premium

When an investor buys property directly, the yield is lower, and more time is required to manage the investment. Investing in funds for real estate is attractive because it can bring a diversified income while not requiring investors to actively participate in managing the investment. Therefore, investing in funds is more suitable for those who do not have the time to manage their investment personally.

When an investor buys property directly, the yield is lower, and more time is required to manage the investment. Investing in funds for real estate is attractive because it can bring a diversified income while not requiring investors to actively participate in managing the investment. Therefore, investing in funds is more suitable for those who do not have the time to manage their investment personally.
- Founder of Migronis ANATOLY LETAEV

What advice can you give to investors on choosing a fund? What do they need to know before deciding to minimize the risks?

Anatoly: First, you need to look at the fund’s portfolio and find out who its founders are. What did they do before in terms of business? What companies were involved? You can find most of this information on the Internet.

Secondly, ask questions about the fund’s exit strategy. As an investor, your capital gain is only realized at the end of the term when the fund sells your assets, so knowing the fund’s exit strategy is essential. The Golden Visa funds are all still young so there is no track record of their past exit strategies. You will have to rely on what their current strategy is all about.

Third, look at the fund’s audit report and ask for a detailed explanation of the business model. Be sure to study the contract carefully, especially the fine print.

Ilana: All funds that are suited for the Golden Visa program will state that in their fact sheets and will be managed by approved fund managers who are regulated by the CMVM which is a regulatory fund investment body in Portugal. Reliable legally operating funds also have investment advisors, a custodian bank, and auditors, and can provide information about them.

Do the funds give investors any guarantees? For example, can they guarantee a minimum income level or the payback period of investments?

Anatoly: According to the Golden Visa regulations, funds do not have the right to give any guarantees. The only thing they can do is share information about their financial model and strategy. Every fund will have a specified term after which you can expect to exit.

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Can you divide the investment required for the Golden Visa between two different funds?

Anatoly: You can choose more than one fund to invest in. It will only decrease your risk if the funds are in different categories and have different strategies. Please note that using more than one fund can increase your acquisition cost, as fund managers each have to do their own due diligence. It also adds to your administration load as you will have to duplicate all the documentation to different fund managers.

How else can investors protect themselves from risks?

Anatoly: It is important to understand the investor’s priority: higher yield or capital protection. If fewer risks are more important, the investor should look at conservative directions for investing. For example, funds engaged in agriculture have a very clear business model, and everything is transparent and as safe as possible. However, the annual return on investing in these funds will be about 2%. While this is a conservative and reliable approach, it is not a very profitable investment. If profitability is a priority, then there are areas where you can get an 8-10% on annual returns, but the risks may be higher.

Which areas for investment can now offer the highest returns?

Ilana: The high-end real estate market is undersupplied, with huge demand, both in the investment and rental markets. This option creates a good potential for high stable yields and capital gains.

Higher yields come with different risks. A high-yielding asset that also provides capital protection is rare.
- Expert on Golden Visa programs ILANA VAN HUYSSTEEN-MEYER

What additional options can funds offer to attract investors?

Ilana: Some funds allow the investor to simultaneously invest in one of the underlying real estate assets within the fund by paying the transfer taxes now and using an internal purchase and interest-free mortgage structure. Others may allow the investor to choose the underlying investment now, thus securing the price of the real estate asset while only making the actual investment after the fund matures. The client then uses the proceeds of their fund investment to pay for the asset. Both of these options allow the client to benefit from the lower tax structure of a fund investment and secure a real estate asset for future use, typically in an area where you can’t invest directly for the Golden Visa purposes today.

How profitable and promising is Portugal in terms of fund investments?

Anatoly: Portugal still offers investors good returns on their investments. Areas of the country that had not developed for some time are now at the peak of their development. Many people from the IT cluster, along with digital nomads, come to live in Portugal. The Web Summit and other significant events take place in Portugal. The number of tourists coming to visit is actively growing. If we look at the statistics for the past few years, we can see how many more new hotels are now in Portugal. Business in the country is developing rapidly at the moment. The Golden Visa program and the NHR positively affected this growth, as it continues to attract investors to the local market. In addition, there are few restrictions and prohibitions in Portugal, and there is room for development, unlike, for example, Spain. Spain is already heavily urbanized and its real estate market is overheated.

Communication is also important. Theoretically, you can find interesting projects in Greece and Italy, but language is often a barrier. Portugal is attractive due to the absence of this barrier, security, and the growth we now see in its economy.

Development activity depends on the region, so conditions will not be equally favorable everywhere. There is, for example, the Azores, which is just beginning their active development and where the entrance costs are still low, but there are already overheated regions. Investors have plenty of options to choose from, and it is better to make an informed choice.

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Which zones and regions of Portugal, apart from the Azores, are developing the most actively?

Anatoly: The Algarve and Comporta are actively developing. Large-scale construction is starting with new brands and development companies entering these regions and already buying all the land.

You need to understand that the situation will change soon in regions where prices are currently low, so it makes sense not to delay investments. Having an example of Madeira, which already went through this active development stage, we can expect that prices will rise in the Azores, which are now at the start of their active development. You can now find many profitable proposals for investment in the hotel business there.

What regions should investors, on the contrary, avoid?

Anatoly: One should be very careful when investing in Lisbon. Lisbon has a terrible bureaucracy; you can invest in projects only after the authorities approve them. So you need to study all the documents and ask very detailed questions to funds or developers. If the city still needs to approve the project, this may signal a higher risk investment because approval in the municipality of Lisbon can take about two years. During this time, a lot can change.

There are also difficulties with investments in Madeira. There is a development group on the archipelago that has its own hotel brand and has bought all the best plots. It will probably be very difficult to compete with them. It also makes sense to invest in projects there only after they have passed all the approval processes.

Read also: Taxes in Portugal, answers to all the important questions

What is the minimum period an investor can invest in the fund? Is it possible to withdraw funds from the fund before the expiration of this period, and under what conditions?

Ilana: The minimum term for a Golden Visa is five years, but funds usually have a structure that requires investments for 6-8 years, including the fundraising period. It is very difficult to withdraw money from any private equity or venture capital structure before the official exit period. Remember, these are not mutual funds or share portfolios but assets with a fixed term.

How can Migronis help clients to find the most suitable fund to invest in?

Ilana: Migronis is a residency by an investment agency; therefore, we can not advise clients on their fund choice. However, we can add value to the process by understanding a client’s risk profile and presenting some funds that meet those criteria. We are actively engaged in the market and spend a lot of time understanding each fund’s investment strategy, fee structure, and exit strategy. We are uniquely positioned to introduce different opportunities to investors and their financial advisors.

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