The Portuguese government has adjusted its regulatory regime to attract investment into its real estate market, particularly the rental market, following the trend of other European countries. This presents opportunities to companies and investors operating in or targeting Portugal.

On February 1, 2019, Decree-Law 19/2019 (passed January 28th) came into effect. It created the formal designation and regulations for legal entities involved in investment and management of real estate assets. These are called “Regime das Sociedades de Investimento e Gestão Imobiliária,” or SIGIs, and can be compared to Real Estate Investment Trusts, REITs, in the U.S. and other markets.

These new SIGIs must abide by certain criteria, as outlined in the law:

  • They are commercial companies with headquarters and effective management in Portugal, constituted under the legal form of corporations, with statutory auditors or fiscal council.
  • The minimum capital requirement is €5,000,000, represented by common stocks.
  • The stocks must be admitted to trading on the regulated market in Portugal or in another Member State of the European Union or the European Economic Area within one year from the date of its incorporation.
  • A minimum of 20% of shares must be held by investors who possess less than 2% of the voting rights.
  • The legal reserve of SIGIs cannot exceed 20% of capital share, the constitution of other unavailable reserves is not admissible, and, within nine months after the end of each year, profits must be distributed in the form of dividends.

The main corporate purpose of SIGIs is the acquisition of:

  • Property or surface rights over immovable property for lease or other purposes, namely, construction and rehabilitation development projects or to utilize the space as offices or stores in shopping centers
  • Participation in other SIGIs or in companies with their head office in another Member State of the European Union or the European Economic Area bound to administrative cooperation in the tax domain, provided that they have a corporate purpose, an asset limit, capital share, and profit distribution scheme similar to SIGIs
  • Units of shares or stocks of Real Estate Investment Entities (OII), Real Estate Investment Funds (FII), or real estate investment companies for rental housing, with an income distribution system equivalent to SIGIs

For this purpose, immovable property is considered to be: (i) rustic buildings susceptible of autonomous economic development, (ii) urban buildings, (iii) autonomous fractions of urban buildings, and (iv) lands that within 3 years of their acquisition may be qualified as urban buildings or autonomous fractions of urban buildings.

For the management and economic development of real estate and/or property rights, SIGIs may contract services to third parties or directly manage and/or operate them.

SIGI assets must be mainly constituted by property, surface, or other equivalent rights to real estate for lease or other forms of economic use, with the following cumulative limits:

  • 80% of the total asset value must correspond to real estate rights and participations,and
  • 75% of the total asset value must correspond to leased real estate rights or other forms of economic use

From the 2nd year of the constitution of a SIGI onwards, the requirements of the asset composition must be verified at all times. Real estate rights and holdings must be held for at least 3 years after their acquisition and the indebtedness cannot, at any time, correspond to more than 60% of a SIGI’s total assets.

The companies are no longer subject to this regime when they stop fulfilling the requirements related with the:

  • Legal form, supervision model, corporate purpose or social capital
  • Asset composition and holding time, simultaneously, for more than 6 months or, for at least one of them, for 2 consecutive years

The loss of SIGI status prevents a company from requalifying as an SIGI for three years, and the management and supervisory board members are accountable to the shareholders for direct damages caused as a result of this loss.

This new regime also provides the possibility of existing entities to become SIGIs by resolution in a general shareholders´ meeting. This is particularly relevant to Public Limited Companies and Real Estate Investment Bodies (OII) under corporate form. To make the conversion, the resolution must be approved by (i) a majority of votes required to amend the company’s by-laws in the case of Public Limited Companies, or (ii) the votes of 90% of the capital share in the case of Real Estate Investment Bodies (OII).

Therefore, with the creation of this new real estate investment vehicle, which is similar to the English REITs and the Spanish SOCIMIs, Portugal intends to boost the rental and capital market as well as direct foreign investment. It is expected that SIGIs will become a popular investment vehicle for institutional investors. Moreoever, it is also expected to attract individual investors, given the simplicity of the investment and the guarantee of income distribution.

Another anticipated impact is that, by promoting the rental market, SIGIs will have a leveraging effect in the renovation of many properties that need rehabilitation.