Real estate funds in Portugal:
is it worth investing in funds?
It is a recurring theme at Rialesa for client investors who commission market studies to see if it is more advantageous to invest in real estate funds or physical real estate.
Of course, each case is a case, but we find such structural (and unfortunately already chronic) problems in real estate funds in Portugal, as a general rule the answer is obvious.
Still, many small investors are legitimately seeking real estate funds to allocate capital.
After all, they are easy to invest, made available (and recommended) by the bank.
In this article we will give you our opinion about real estate funds in Portugal, inside and out.
“Real estate investment funds (FII) consist of capital raising of several participants in a “cake”, with the participants having units of participation of this “cake”. Then the FIIs will buy real estate assets, which they will monetize, then make the proceeds available to the owners of the units. Most European funds, and in particular national ones, are mainly devoted to the leasing of real estate assets in the commercial sector (such as offices, shops and retail areas / warehouses). Any FII can naturally enter the residential sector, and even acquire land and opt for real estate development, but this has not been the recent practice in Portugal.”
The real estate funds are managed either by a particular management commission or by a management company (the most common form in Portugal), which buys property to put them on the lease market (or resale, but as I said before, this case is less popular in Portugal).
In theory, given that real estate values over time (as long as we speak of a sufficiently large period), the FII appreciates once its assets also value. In addition, the FII obtains rent through the lease of real estate, which also values it as long as the distribution of profits (payout) is not 100%.
FIIs are accessible to small investors because they do not require a lot of subscription capital and can be subscribed with a bank or an online brokerage firm. Some national funds allow an initial investment of as little as € 50. However, the FIIs may charge subscription, redemption and management fees.
Like the vast majority of investments, real estate funds are not equity investments or guaranteed income. For example, if there is poor capital management or a devaluation of real estate, the fund’s holding units depreciate and investors may lose capital.
The funds mitigate this risk by having diversification of assets by markets and sectors, so studying the portfolio of an IFI is crucial before investing.
A real estate fund holds real estate assets, but trades in units, which are securities. Therefore, they are regulated by the CMVM. In addition, the funds have a restricted activity so that their activity does not become too risky for subscribers / investors.
Differences between investing in real estate or real estate funds:
First of all, real estate funds are (structurally speaking) a fantastic way to invest in real estate. But investing in real estate funds is very different from investing in real estate, at all levels.
A real estate fund is by definition powered by a group of investors, who have a position in the fund. As such, it is a collective investment, since several people apply their money in the fund together.
The fund, in turn, applies that capital to real estate, in order to obtain income. These proceeds are usually obtained by leasing the assets of the fund, although there are several funds that specialize in the purchase and sale of real estate.
The most similar form – at the individual level – of investing as a fund, is investing with more partners. However, since this model has no scale, it does not take advantage of the properties of a fund, as I show below.
A small group of people has no scale, which is one of the biggest advantages of a fund.
With scale, the funds can eventually get better business opportunities, possibility of trading, presence in various markets, etc. Incidentally, a fund may have, in addition to an administration, negotiators and commercials, tax advisors, a marketing team, etc.
Imagine a company where there are several departments specialized in several different sectors – a fund will not be very different from this vision …
In fact, it is through this set of properties that funds provide advantages (see below).
Your position is measured differently. Both legally and fiscally.
For example, imagine that the fund has a total capital of 100 million euros and you have only 10,000 euros invested in the fund.
So, in theory, it will have 0.01% of the fund. But remember that in practice the fund’s price fluctuates (based on the value of the fund’s assets), just like in the stock market, and so its value in terms of position also fluctuates.
Advantages and disadvantages of investing in real estate funds compared to real estate:
Conceptually speaking, real estate funds are a fantastic way to start investing in real estate, and they present several advantages when compared to investments in real estate:
Firstly, because they have more resources, they theoretically achieve higher returns and much more diversification
In theory, the fact that the funds have more resources in real estate investments causes them to have higher returns.
In investments in general, there is a trade-off between the profitability and the capital to be invested. For example, when a customer orders us market studies, so that you can invest in real estate, ArrowPlus usually give you an idea of the profitability that can be achieved.
But these returns fluctuate as a result of the capital to be invested: the more capital is invested, the greater the potential for return … Thus, as real estate funds have far more resources than small investors, they can achieve higher returns.
At the same time, think of this: more money makes more money and allows for greater bargaining power!
With more resources, funds can also find (better) deals in a more systematic and methodical way.
In addition, the funds get privileged channels for material and remodeling, obtaining tenants and methods of monetizing the properties they own.
However, and somewhat strangely, this does not necessarily lead to greater gains … I’ll tell you below about the gains in real estate funds in detail. But ahead of you already … the main reason for a small investor to often get higher profitability by investing for himself in real estate is that a fund has a very large structure.
I like to call this structure “monster” … a monster that “eats” much of the gains.
This structure is composed of a management committee (small, large or delegated to a specialized company), has logistical expenses (income, services, salaries, etc.) and still has to make investments based on short or medium term projections, as well as the clear pressure it has to distribute dividends.
You do not have to do anything (much less manage renters): your investment is passive
In clear contrast to the lower profitability that the funds can generate, there is soon to be a big advantage: investments in real estate funds are much more passive.
Think with me: 1. it is not necessary to look for tenants (or delegate this task to a real estate agent, in return for commissions – that is, lowering the profitability of the investment), follow up contracts and works if they exist, search and identify real estate to acquire (and go to notaries to do public deeds), put them up for sale to make a profit, etc.
The funds deal with all this for themselves – good or bad, or rather, according to a strategy of their own that may or may not go against their own and in return for a (generically speaking) loss of profitability. But this is a measurable gain if, like me, you do not have time to manage your own real estate investments.
Preserve liquidity, which is a big financial advantage … and not financial
The advantage of liquidity is much more evident than it may seem …
Although many of the funds in Portugal have redemption fees (ie amounts payable if you want to settle their position in the respective funds), others do not (especially if you can negotiate directly on the primary market).
Now, if you buy a property, your liquidity is much lower, because it is much harder to “get out” of the business. As a rule, a property is not sold overnight! If you already settle your position in a fund you are a couple of clicks away from the broker you are using (or a call to the bank manager if you choose to have your wallet in an old-fashioned bank).
But then investing in real estate funds looks great … Except there are also major disadvantages:
You have no control over the application of your capital.
From the moment you put your money into a fund, you essentially lose control over your investment.
Swapped by kids, the bottom line is they will decide how and where to spend their money. I used the term “spend” to provoke him, of course – at the outset his money is “invested,” not “spent” …
The market – the city – to invest. The type of property – retail or residential. The type of remodeling made in the assets. And many other angles – forget it … The background does it for you.
If you invest in real estate on your own initiative, then you will have complete control over how to apply your capital. And all the headaches that come with it.
Generally lower returns.
I own returns of 17%, 19%, 22% in my real estate business. Of course, this margin after being net is lower, because I use a structure to have these properties “to monetize”.
But even so … compared to real estate funds, my returns are much higher!
Investing in real estate in Portugal, on its own initiative, usually has a much better return than investing in real estate funds. This, if you know the best markets, types of real estate, how to identify real estate, etc.
But this angle is not the rule. Most customers who ask for market research to ArrowPlus reject investment in real estate funds because the profitability is low, compared to the markets we study.
In addition, in Portugal, there are many underwriting and redemption fees as a general rule. These also greatly affect the final returns of the funds.
Today, I continue to invest in real estate funds – partly reduced, since physical real estate is my priority. However, I prefer to work with foreign funds (see below) and those that have an inter-continental diversification.
If we have to come to a conclusion at this level, there is no generic answer, period. Each investor has to evaluate the advantages and disadvantages that I listed, and evaluate how you feel most comfortable.
Remember: the best investment is one that you know well and with which you are completely comfortable.