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Government Studies Regime for Real Estate Investment Companies

3 October 2017

The Government is evaluating the creation of a tax and regulatory system for real estate investment companies.

The Government is assessing the establishment of a regulatory regime for real estate investment companies focusing on rental properties. This measure was announced by the Secretary of State for Fiscal Affairs at a real estate conference, and António Mendonça Mendes signalled at the time that this assessment would go ahead as soon as the discussions around the 2018 State Budget come to an end. The objective is to create an instrument that will transform a real estate investment into a financial investment.

Under consideration are the so-called ‘Real Estate Investment Trusts’ (REITs), a legal arrangement corresponding to an investment vehicle in which it is incumbent on the State “to create the legal and regulatory framework for classification,” said official source of the Ministry of Finance, adding that “it is of the utmost importance for investors, especially foreign investors.”

The government also has stated that “the role of REITs is understood in Portugal, and the political commitment exists to further its implementation in a framework of simplification, transparency and attractiveness, functioning in service of a government-defined housing policy based on promoting rental housing.” As a rule, these companies invest in real estate destined for the rental market and do not contemplate renovations intended for sale, which has powered real estate sales in recent times.

Spain already has a legal framework with these characteristics that, in practice, allows investors (even those with lower financial capacity) to invest in real estate, but in a way that guarantees them liquidity and returns. Unlike other financial instruments, real estate investment companies usually distribute 85% of their profits in the form of dividends.

All this has led to such fiscal regimes (focused on in investment in rental properties) gaining popularity in several EU countries, particularly in a time when another type of investment has lost its attractiveness due to the low-interest-rate environment. For the moment, the Ministry of Finance points out that this arrangement “has been worked on with a political commitment to its implementation in a framework of simplification, transparency and attractiveness, functioning in service of a government-defined housing policy based on promoting rental housing.”

In his speech at the Real Estate Summit, organized by Vida Económica in September, the Secretary of State for Fiscal Affairs stated that, “considering the structure of the housing and real estate market, where rentals are still underrepresented, REITs constitute a powerful instrument and an opportunity for both the Portuguese government and foreign investors to bet on the rental market, benefiting from a very attractive tax regime. ”

António Mendonça Mendes also said that these arrangements “will be advantageous in that they can benefit from a tax regime that articulates in a balanced way the taxes on the income and the taxes on property”.

For Ricardo Reis, a partner at Deloitte focusing on property taxes, this kind of regime has long been expected by the market, since it would permit actors in the sector to respond to the market’s needs, by transforming a real estate investment into a financial investment, an alternative to other types of saving.

The previous government included a legislative authorisation to study this sort of vehicle in a previous State Budget, but the measure was never taken up.

When queried by Lusa, the president of APEMIP – Portuguese Association of Realtors and Real Estate Agents, Luís Lima, said he agrees with the creation of a particular regime for these companies. “My impression of the measure is favourable,” he said, arguing that Portugal “should follow the Spanish model” in this matter.

“A person with assets of 100,000 or 150,000 euros, can allocate the asset into a corporate structure that will be able to avail itself of a tax benefit to which it would not otherwise have access. This would allow the middle class to take part in the rental market,” he stated.

Original Story: Dinheiro Vivo – Ana Margarida Pinheiro / Lucília Tiago

Translation: Richard Turner