Income from Portugal’s real estate funds has more than quadrupled due to tax exemptions. Explore the effects on investment strategies and market growth.
In recent years, Portugal’s real estate market has witnessed a remarkable transformation, particularly in the realm of real estate investment funds (REIFs). A recent audit by the Court of Auditors (TdC) has unveiled striking statistics regarding the income generated from these funds, which have experienced a staggering 359% increase in income not considered taxable profit between 2020 and 2022. Let’s delve into the implications of this growth, the favorable tax regime that has facilitated it, and the broader impact on the Portuguese economy and investment landscape.
The Favorable Tax Regime: A Catalyst for Growth
The TdC report highlights that the income from the activities of real estate investment undertakings (OII) has surged significantly, with typical income sources such as property income and capital gains increasing by 67.4% from 2020 to 2022. This growth can be attributed to the favorable tax regime established in 2015, which has incentivized both retail and professional investors to engage with real estate funds.
Tax Benefits and Their Impact
The audit reveals that a staggering €1.743 billion was not considered in taxable profit over the three-year period, underscoring the attractiveness of the tax regime for real estate funds. The report notes that the income generated by these funds more than doubled between 2021 and 2022, showcasing the growing confidence among investors in this sector.
However, despite the impressive growth in income, the actual tax revenue generated from these funds remains relatively modest, totaling only €27 million during the same period. This discrepancy is largely due to the unique characteristics of the tax regime, where only a small fraction of funds—approximately 10% to 14%—paid corporate income tax (IRC) each year.
The Rise of Retail Investors
One of the most significant developments highlighted in the TdC report is the increasing participation of retail investors in real estate funds. Following the implementation of the favorable tax regime, there has been a notable resurgence of confidence among individual investors, leading to a near doubling of participants from 2016 to 2023. The number of participants reached 112,287, although it remains below the peak of 2010.
Shifting Investment Dynamics
The report indicates that while retail investors are becoming more prominent in the real estate fund landscape, the majority of the value under management is still held by professional investors, including credit institutions, other investment funds, and pension funds. This shift in dynamics reflects a growing trend where retail investors are beginning to replace traditional financial institutions as significant holders of OII holdings.
The Broader Economic Implications
The surge in income from real estate funds and the increasing participation of retail investors have broader implications for the Portuguese economy. The favorable tax regime has not only attracted domestic investors but has also positioned Portugal as an appealing destination for foreign investment in real estate.
Attracting Savings and Investment
Despite the impressive growth in participation, the audit reveals that real estate funds have only captured an average of 5% of the total investment of savings from 2009 to 2023. This statistic raises questions about the overall effectiveness of the tax regime in attracting significant capital inflows into the real estate sector.
The report suggests that while the number of participants has increased, the actual amount of savings directed towards real estate funds remains relatively low. This indicates that there may be barriers preventing retail investors from fully capitalizing on the opportunities presented by the real estate market.
The findings of the Court of Auditors’ audit shed light on the remarkable growth of Portugal’s real estate funds and the favorable tax regime that has facilitated this expansion. With a 359% increase in income not considered taxable profit between 2020 and 2022, the real estate investment landscape in Portugal is evolving rapidly.
While the participation of retail investors has surged, the overall impact on capital inflows into real estate remains modest. As Portugal continues to navigate its economic recovery and attract investment, it will be crucial for policymakers to assess the effectiveness of the current tax regime and explore ways to enhance the appeal of real estate funds for a broader range of investors.
The future of Portugal’s real estate funds looks promising, but there is still work to be done to ensure that the benefits of this growth are fully realized across the investment landscape. As the market continues to develop, stakeholders must remain vigilant in addressing the challenges and opportunities that lie ahead.
