How Portugal adopted the Real Estate Investment Trusts (REIT) regime

On 1 February, the Real Estate Investment Trusts Regime (“REITR”), approved by Decree-Law no. 19/2019, of January 28, came into force. The Real Estate Investment Trusts (“REIT”) presents itself as a new investment vehicle that aims to promote and stimulate the real estate market in Portugal.

These investment vehicles are not new in real estate. In fact, they were created more than 50 years in the US.

REITs have already been adopted by over 30 countries worldwide, and there creation was expected in Portugal since the 2014 State Budget, however, it only came to fruition in 2019.

Moreover, after the adoption of these types of companies in Spain and Ireland, the Portuguese regime has demonstrated the capacity to attract foreign and domestic investment to the real estate markets of those countries.

Nevertheless, the Portuguese regime presents some particularities which are expected to make REITs more attractive to foreign investors.

Indeed, the fact that the Portuguese regime allows a REIT to use the goods acquired by itself to other economic activities other than leasing, right after its acquisition, is a distinctive feature compared to similar regimes in other countries. This permission contrasts with regimes in other European countries where REITs have existed for a longer period and where there is an obligation to lease the acquired assets for a given period of time. This will be one of the strategic elements that will allow the Portuguese REITs to compete with those of other European countries, since some of them would already be able to use the acquired assets in other activities than to lease them.

These companies are mainly engaged in the acquisition of rights in rem in immovable property, for rental or other forms of economic use, the acquisition of participations in societies with equivalent object and requirements and the acquisition of participations in real estate investment funds with a similar income distribution policy.

REITs are also characterized by their shares being mandatorily traded in the market and subject to specific capital dispersion requirements, as well as certain rules of composition of the assets, as well as the obligation to distribute the respective profits.

In order for a commercial company to be qualified as a REIT, it must have been incorporated with a share capital of € 5,000,000 and been established as a Public Limited Company (SA), which has its headquarters and effective management in Portugal, be supervised by a Statutory Auditor (“ROC”) or a Statutory Auditor Society (“SROC”) that is not a member of that body.

Regarding the REIT’s assets, it should be constituted mainly by property rights, surface rights or other rights of equivalent content on real estate, lease or other forms of economic use, subject, however, to certain limits, namely: (i) The value of the rights over real estate and shareholdings shall represent 80% of the total value of REIT’s assets; (Ii) The value of the rights on leased real estate or with other economic use, must represent at least 75% of the value of such assets of the REIT and (iii). REITs’ indebtedness cannot account for more than 60% of the value of its total assets. In order to be easily identifiable, a REIT should mention one of the following expressions: “Sociedade de Investimento e Gestão imobiliária, SA” or “REIT, SA”.

One year after its incorporation, REITs shares must be admitted to trading on a regulated market or selected for trading in a multilateral trading system operating in Portugal or in another Member State of the European Union or the European Economic Area.

As for income, after nine months at the end of each year REITs must distribute in the form of dividends:

I. 90% of the profits for the year, resulting from the payment of dividends and income from shares or participations units;

II. 75% of the remaining profits for the year, distributable under the law;

II. At least 75% of the net proceeds from the sale of assets used in the pursuit of the corporate purpose, must be reinvested in other assets within 3 years from the said sale.

REITs as Real Estate Investment Companies benefit from the neutral tax regime applicable to those companies, which are set up and operate in accordance with national law. REITs are also governed by the rules applicable to Public Limited Companies, and the special legal provisions applicable to Publicly-Held Companies may be applicable to them if they acquire that status.

There is therefore a huge anticipation to see how investors will react to the Portuguese REITs, particularly if they are interested in using the property acquired by the funds for lease purposes or if, on the other hand, they wish to take the opportunity and pursue other economic activities.

It seems to us that the diversification of investment options for real estate assets is absolutely essential to ensure the sustainability of the real estate market in Portugal.

Artur Filipe Silva and Diogo Moreira Ramos

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