Portugal has attracted many South African and Chinese investors who like the appeal of owning a piece of prime Portuguese real estate that gives access to European residency and citizenship. But the rules have changed in some areas, which means you may not achieve the original goals of your offshore move. In this sponsored interview, Andrew Rissik of Sable International, explains the changes and also sets out some other attractive alternatives for South Africans looking for a Plan B in the Mediterranean country as well as the opportunity to generate returns in a hard currency.
*This content is brought to you by Sable International
I’m Jackie Cameron from BizNews. With me is Andy Rissik, MD of Sable Investment Migration. Welcome, Andy.
Thanks so much for having me with you today.
Andy, there have been a lot of changes for South African investors who have been wanting to move to Portugal, gain a foothold in that property market and take advantage of the citizenship perks there. But apparently there’s been a lot of changes. Could you please talk us through those?
Like all these programmes, I think Portugal has had this residency by investment programme. It’s also commonly known as Golden Visa, which was launched in 2012 by the Portuguese government. We’ve been working with clients since then. We’ve got in excess of 200 South African families that we’ve assisted with obtaining Portuguese residency. Over the years, there have been many changes.
Some of them have been frustrating. Some of them have been very positive. I think the most important recent change that people are talking about is – up until recently – all real estate in Portugal qualified you to be able to apply for residency, as long as you invested either a minimum of 350,000 euros or 500,000 euros. But earlier this year, there was a vote that got passed through the Portuguese parliament to disqualify properties in the Lisbon and Porto regions, which are obviously the two primary markets in Portugal. So that is really substantial.
We’ve got in excess of 200 South African families that we’ve assisted with obtaining Portuguese residency.
Where does this leave your current clients?
On the advice of our legal advisers in Portugal, we’ve been saying to clients for the last few months, it’s very risky to be investing in real estate in Porto and Lisbon too close towards the end of this year, because this change is – for all intents and purposes – going to take effect from 1st of January 2021.
But what people don’t realise when they read an advert in the paper saying ‘Hurry, hurry buy in Lisbon before it no longer qualifies.’ If you were to buy a property in Lisbon today, you would still need to get your residency application submitted before the 31st of December. The chances of that happening are probably quite low, because there’s so much paperwork that one needs as part of an application. For instance, birth certificates, unabridged marriage certificates etc. These are things that one needs to get from Home Affairs in South Africa. There’s also quite a lot of bureaucracy on the Portuguese side. With Covid, a lot of the government departments are also working at slower rates than normal. So we just see it as quite risky.
What about the clients of yours who bought some time back? Are their investments still safe?
Absolutely. Once you’re in the programme, you’re in the programme. If you bought a property in Porto a year ago, you’ve submitted your application and you’ve been approved, then they can’t take that residency away. All that means – these new changes that we’re talking about – is that nobody should be investing in real estate projects in those two jurisdictions.
I suppose one effect that it will have on existing clients is, let’s say you bought a property in Lisbon three or four years ago. When it comes to selling the property in three or four years time – if you decide to exit that – obviously you wouldn’t be able to sell it to a golden visa investor. But if you look over a period of six years, about 7000 odd families have invested through this programme in total, in Portugal. So it’s been an important part of the real estate market, but it hasn’t been the be all and end all. There are other people who will buy your investment.
If you bought a property in Porto a year ago, you’ve submitted your application and you’ve been approved, then they can’t take that residency away.
What are the other options for South Africans who want to gain EU citizenship or access to living there and also reap the benefits of investing in property in Europe?
Just speaking about Portugal – in terms of investment, one doesn’t necessarily only need to invest in real estate. But with Lisbon and Porto falling away now, there are other very interesting real estate investment markets in Portugal. But one just has to be a little bit more careful about understanding what fundamentals are driving those particular markets.
I spent a lot of time in Portugal personally. I’ve got a real estate manager who works for Sable full-time on the ground in Portugal. We always make sure that we’ve got interesting and good investment stock for our clients. In fact, in the last year, we’ve probably done more deals in areas other than Lisbon and Porto, than those two themselves. But another very interesting investment opportunity is these so-called private equity funds. About two and a half years ago, the government created a new category of investment that qualifies one for the residency.
What that says is, you can invest in a fund – which is a private equity fund – and it can’t be seen to be investing directly in real estate. So, it needs to invest into businesses and to basically capitalise investments in Portuguese businesses. We brought the first private equity to market about 18 months ago – two years ago – very successfully. It was sold out towards the end of last year. That was 80 shares in a very nice five-star hotel business in Lisbon. The same operator has recently just launched a new one, which is a private equity fund that holds a fantastic hotel business in Porto.
Now why this is really interesting is that, because it’s a private equity investment, you’re investing in the underlying hotel – the physical asset – as well as the business, it qualifies you for a golden visa. The other nice thing about this particular fund is that the minimum threshold is 350,000 euros. So we think it’s a compelling opportunity. We launched it about two weeks ago and we’ve had fantastic subscriptions so far. That’s one really worth having a look at.
Just speaking about Portugal – in terms of investment, one doesn’t necessarily only need to invest in real estate.
How does that fund work? Is it sort of closed end? Is there a limit to how long you have to stay invested? Can you just elaborate a bit on what the details are with that investment?
The fund life is a maximum of 10 years. So that’s always the fundamental difference between investing in a fund and real estate, is that you’re coming and you’re essentially buying a share in a fund. From a liquidity point of view, if you want to exit between now and when the fund ultimately sells the hotel on, that would be slightly more difficult than if you owned an apartment, say that you decide two-three years in that you want to pull out of the programme for whatever reason, you could sell it.
But it is a closed fund. It won’t be acquiring any more assets. The particular asset that it owns is this luxury hotel called the Rebello. It’s on the Douro River opposite the old city of Porto and essentially, it is 125 shares at value to 350,000 euros each. It won’t be there for longer than 10 years. The fund life has a max of 10 years, but maybe after sort of seven or eight years – if it’s an optimal time for the fund managers to look at liquidating the asset – then obviously there’ll be a general meeting.
All the investors would be consulted. But one thing worth mentioning – and it’s important for investors to understand – is that the fund won’t get liquidated before the last golden visa investor has achieved their permanent residency or citizenship. So it leaves a long enough window for investors to come in and go through the process, because it’s never as clear cut as five years plus one. It can sometimes take a little bit longer. So we always say to people to allow for about seven years.
So what about the underlying investment here? Is this of interest to your investors? Or is it largely the opportunity to get the visa?
That’s a great question. There are lots of opportunities where one can sort of invest to get the residency. Sable takes a very keen approach on investment. We always want to make sure that the underlying investment is something that a local person would invest in, not just somebody looking for residency or citizenship. Anecdotally, this has been seen in clients of ours who have sold their properties on and invested in other properties.
They’ve generally done really well and it’s the same thing with this private equity investment. We really believe the operator has a good track record. We’ve worked with these developers and hotel operators for nearly four or five years now. This is their sixth project in Portugal and they’ve got a very successful hotel operation. It’s absolutely prime real estate, the underlying hotel asset – it’s old port warehouses that are being converted into a five-star boutique hotel.
It’s right on the river. It’s in a UNESCO World Heritage site. We believe that the underlying physical asset is very valuable. But then more importantly, the hotel operation – and you may have seen in the last few years, Porto’s a very popular city globally for tourism. The two fundamentals I think that one has to look at in this investment is Porto real estate. Where does this hotel actually stand? Secondly, what is the tourism market like in Porto? It’s very buoyant.
We really believe the operator has a good track record. We’ve worked with these developers and hotel operators for nearly four or five years now. This is their sixth project in Portugal and they’ve got a very successful hotel operation.
So where do your returns come from in this fund? Is it at the end when you sell? Is there some kind of capital gain? Or are there also income streams coming out of this?
There are actually three different routes to getting a return – what we refer to as the preferred return. Once the hotel starts operating, then an investor will see 3% of the value of the investment per annum returning to them – we call that a preferred return. It’s not a guaranteed return, although technically it is.
But it isn’t, because if it is a guaranteed return, then this investment would be seen as a bond. But it’s not. It’s private equity. There is then also a periodic reconciliation. There’s a share between the fund and the hotel operator in any operating profit in the hotel. Then, I think the real interesting thing will be at the final sale of the investment out of the private equity fund, is that the investors will get their capital back plus 70% of any capital upside.
So the operator is contracted to get 30% of that upside. They’re obviously very focused on driving the value of that asset. That is done by managing and driving the hotel professionally and running it at high occupancies and achieving good bed night rates.
So somebody who puts R350,000 in today, what can they expect in 10 years time?
The good old crystal ball. It’s a difficult question to answer. Obviously the preferred return of 3% is calculable, provided Covid gets sorted out and hopefully a vaccine comes in early next year and becomes effective so people can travel freely again.
They will see, I think, some quite nice revenue share returns. In terms of the capital growth on the project, I would say one could probably expect maybe – per annum – 4-5%. But that’s my opinion. It’s not something that’s guaranteed. There are so many things that it depends on. But if you look at the trajectory that Portugal has been on for several years now – in terms of being a very attractive tourist destination and what drives tourism in Portugal – that’s ultimately going to determine the value of the asset at the end.
But another thing worth mentioning, the hotel is currently under construction. Again, a world class construction company is busy with it. It will be complete towards the end of 2021. We actually believe that the buy in price at 350,000 is actually below what the market value of the fund will be when the hotel opens. So there will be some – if you were to compare it to real estate investment – there’ll be some development upside for the investors, definitely.
In terms of the capital growth on the project, I would say one could probably expect maybe – per annum – 4-5%. But that’s my opinion.
We’ve had some horror stories about property over the years. Not necessarily in Portugal, but just in broad brush strokes with property schemes. What kinds of checks and balances are they in place to reassure investors that the money is in good hands?
That is a really important question, because I think if you’re living in Cape Town and you want to go and buy a property off-plan in Johannesburg, there’s a lot of risk. If you’re doing it from South Africa and you’re investing in Europe you’ve got those normal risks, plus you’ve got currency risk. We all know that the South African rand is a highly undervalued currency and will continue to be for a long time.
So taking risk in Europe is really amplified, just because of our currency situation. So, the two things from a development and sort of real estate perspective one needs to look at, is the financial risk and the delivery risk. What’s important to note is there’s no debt finance on this particular investment and also a really good construction company. The developers behind the programme, as I said, this is their sixth project that we’ve done with them. We’re very comfortable with that.
In terms of the hotel operation, they’ve got various other hotels. They’ve got two in Portugal. One can also have a look at the performance of those to get some sort of idea of who you’re doing business with. Going a little bit broader than what we’re talking about here, one needs to be really careful why somebody is investing in property in Europe? If it’s for residency or citizenship, one needs to make sure that the actual investment is genuinely a qualifying investment and that it’ll actually get them the goal of acquiring residency, because that’s often really the primary objective.
The second objective is to make a good, hard currency investment. Generally, as a South African, I think that when you look at the long-term trend of the rand, any sort of reasonably good property investment or private equity investment in Europe will be good long-term, just in terms of your currency hedge. But yes, they are horror stories. We’ve seen people who’ve bought properties for 350,000 euros. There’s some quite complex requirements to those sort of cheaper, entry-level investments.
They find out that they actually don’t qualify and they’ve ended up with investments that haven’t got them their residency. Also, we’ve seen people buying stuff off plan where there’s no chance that the developers will ever break ground. So it’s like any investment. You really need to know who you’re dealing with. We’re extremely strict with our due diligence and very cautious because our clients are looking for a hedging investment. They’re not looking for undue risk. So we always make sure that we’re dealing with partners who are rock solid and have got a great track record.
What’s important to note is there’s no debt finance on this particular investment and also a really good construction company.
Are there specific regulators who have oversight of these types of funds in Portugal?
Yes, they are, particularly the private equity funds. It should have a proper asset management firm that manages the fund. In this particular case, there’s a fund manager by the name of Lynx Capital. They are an experienced Portuguese regulated asset management company. They are the asset managers and the administrators of this fund and the previous fund – it’s the same crowd of people that we’re dealing with. So absolutely. It’s all legitimate and also approved by the CMVM in Portugal, which is the equivalent to what we in South Africa knows as the FCA – or used to be the FSB, the Financial Services Board.
So it’s a highly regulated product. It definitely ticks all the boxes in terms of regulatory approval in Portugal as a financial product, but also importantly that it also ticks the box with the immigration authorities. They see this as an authorised, qualifying investment.
Before we close off, just in terms of the tax, where is this fund registered and what are the tax implications for South Africans?
So the fund is registered in Portugal and that is one of the requirements. Portugal doesn’t want investment going into anything that’s offshore. So all these incentives around residency and citizenship programmes are specifically to attract foreign direct investment into the country itself. So that’s no different with this fund. It’s a Portuguese registered fund that’s managed by a Portuguese asset manager.
In terms of tax, it’s a very attractive tax vehicle – the private equity. So there’s no tax charged on that 3% income per annum in Portugal. So if you were a Portuguese investor and you invested in this, you would receive that 3% per annum tax free in Portugal. But for a South African investor, it’s slightly different because as a South African taxpayer, we’re taxed on worldwide earnings.
So whilst that 3% is not taxed in Portugal, it would be taxed in South Africa as part of your global tax return. The reason I’m just highlighting the difference – if you owned an apartment, for instance, in the Algarve and you were renting it out – as a non-resident taxpayer, they would withhold 28% tax. That’s the withholding tax for non-resident investors and you’d get a tax credit against your South African tax return. But on this private equity, there would be no withholding tax in Portugal. So you’d pay tax on the full amount in SA.
So the fund is registered in Portugal and that is one of the requirements. Portugal doesn’t want investment going into anything that’s offshore.
Are there any other points you’d like to highlight about this fund compared to direct property investing in Portugal?
I think the private equity fund is quite a specific type of investment. What we know is that people love bricks and mortar and certain people just prefer financial investments. I think one of the big plus sides of this private equity is – apart from the fact that it’s a lower capital threshold than real estate – that it’s a very simple investment. You basically make the investment, you own a share and there’s no management hassle. At the end of the day, when the fund gets liquidated, you get paid your return and you get your capital back.
So it’s not like owning an apartment where geysers burst and you’ve got rental agents phoning you to get authorisation to spend money if something goes wrong etc. Another benefit, I think, as well is that if you buy a property, you’re going to spend probably 7 or 8% on transfer duty, much like you would in South Africa. Whereas if you buy this private equity investment, there’s no duties or taxes payable on the acquisition. That as part of your whole cost of acquiring residency does make quite a big difference.
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