Strategies For Investment And Retirement
STRATEGIES FOR INVESTMENT AND RETIREMENT IN A VOLATILE WORLD
It is perhaps fitting that I found myself writing this article about investment and retirement in the air between the UK and the EU. On the day of the referendum, I flew between the two regions. I, like millions of others, stayed up to learn how the rules of engagement of the last 40+ years were about to change. The last time I landed in Faro, I sat in the car and learnt how the government had continued its sustained and systematic increase of taxes, in particular singling out property owners.
So I am fully expecting more (unsettling) news when I land somewhere else…and true to form, I land in Spain where I hear that a minority government, which many say will be unable to govern, has finally been appointed. As I land in each different country, I cannot immediately predict what changes there will be nor how they may affect the business or its clients. Certainty: there is little of it.
Over the years, our approach to Portugal and the UK has been motivated by what I term positive investment and retirement: looking to the potential of each market. Now, with the barrage of negative news in Portugal, in particularly affecting tax, a huge dollop of uncertainty in the UK, and political and social uncertainty in the US, it seems sensible to adopt a defensive strategy to markets. Much criticism has been levelled at governments for failing to create a stable environment within which investors can plan and deploy their investment Pounds, Euros or US dollars (don’t hesitate too long if you have the latter!). In this article, I will explore two structural changes, one each in Portugal and the UK, which should make all seniors and potential retirees think about whether and how they intend to invest for their retirement.
For years we have promoted the benefits of long-term rentals, both as a flexible solution to our core retiree market, but also as a way of contributing real value to regions such as the Algarve during the quieter winter months. Despite understanding the long stay message and the flexibility that rentals provide, many clients purchase their dream home in the sun. With a pre-Brexit pound at historical highs above 1.40 and a rampant US dollar as strong as €1.05, the allure was undeniable.
However, things have changed. Just like that.
With the only certainty, in an otherwise uncertain and volatile environment, being that taxes on real estate will continue to rise, it is our belief that all those seriously considering Portugal as an investment and retirement destination need to take some practical steps to limit their risk. These are some of the things that seem important to consider, in particular for those for whom a sudden change in cash flow might mean a significant risk, both in Portugal and the UK markets, in which significant change has occurred:
- €500,000, in real estate terms, is a critical number. The new wealth tax will apply slightly above this, from €600,000 per taxpayer, but we are convinced that this level will drop in the future. Consider carefully any recourse to debt financing below €500,000, as the real cost of this debt, if it cannot be offset against the level of “wealth”, is much higher than you will see on your monthly mortgage statement. The extremely successful Golden Visa programme via the real estate investment route, has this level set as a minimum investment level. Our prediction is that over time the wealth tax limit will reduce to €500,000 or even lower for a hands-off investment and retirement (for those UK residents considering the Golden Visa as a way of protecting against Brexit and access to the EU, please read our related article entitled “GV as post-Brexit solution to retention of EU rights”
- With the tendency being for government to arbitrarily “value-up” properties and every indication being that it wishes to bring official values in line with its “perceived” real market value, spurred on by comments of real estate agents and tourist operators, that business has not been as good in a decade or more, investors should allow some margin for manoeuvre. We recommend setting a setting a cap at €400,000 for individual property purchases. So our first suggestion: be cautious of the GV program and look for detached villas in prime areas (for example with sea or golf views) in the sub-€400K range. These should provide optimal triple protection: prime location and demand, ability to rent with the possibility of asking a premium if new taxes have to be passed onto the end consumer, and the likelihood that the value will remain below the wealth tax band for some time.
- Do not purchase multiple properties with a total value above €500,000. One exception: redevelopment projects which can be bought and sold on after refurbishment as this can be built into the project’s P&L and projected returns;
- Look for yields: If there is one thing which has happened in Portugal, it is that tourism has translated into greater demand. Try to find villas with 5% gross yield and apartments with achievable yields in the 5-8%. Greater yields demand one thing: lower prices. Stay clear of premium product unless it is clear that the revenue-generating option clearly covers cost and delivers a return. Focus on well-located apartments less than €200,000.
- And if you are considering moving to the region, consider renting, long-term or even permanently as an option to buying. Anyone renting is protected from all the above taxes, and have the flexibility to act quickly if something does happen to affect their status as a tenant. In a volatile market, being liquid and flexible are among the best tools to allow for quick reactions.
Not many of our European clients consider the UK as an investment and retirement destination. After all they are looking for an improvement in lifestyle and it would generally be surprising if they were to take up the vacuum left by departing Brits. Nonetheless, UK buyers continue to hunger after the combination of Southern European lifestyle and a protection of their capital and possibly even life at home. The referendum of June 23rd has irrevocably changed the options available and some things are unlikely to revert to what they were, which means that we have seen an increase in requests from clients asking us for assistance in all of the aspects below:
- At current exchange rates of around £1:€1.10 (a little higher after the US elections), Brits are sellers in Southern Europe. Even exceptional deals do not look as enticing as they were 6 months ago. UK buyers should consider holding off on buying and rent long term to achieve your lifestyle aims;
- If you are a British homeowner, now is a great time to sell or to generate higher than normal rental returns. Consider placing your property with an experienced agent who has the ability to market it internationally or who is able to find rental clients beyond simply the peak summer season (or ideally do both);
- Although there is some merit to the argument that the Pound may fall further, and so people may gain (in Euros), most buyers do not wish to become embroiled in a speculative currency market. Selling a property (in order to then earn more Pounds and make a profit) takes much longer than to buy one. Consider investing in fixed-return investments in high-growth sectors in the UK where your capital will grow regardless of what it is worth in a foreign market. Consider a strategy of some capital protection with some allocation of capital to lifestyle. With the pension reform in recent years, this is now perfectly possible given that everyone has the discretion to invest a significant portion of their pension pot, tax-free. Consider also the sale of a primary residence and the division of the proceeds into two markets, home and abroad. To some degree you will be mitigating against currency risk;
- For those unwilling to put their retirement or move abroad on hold, think of a multi-currency strategy: downsize at home in your home country, buy a smaller property in the same currency and use the rest to rent or purchase your dream home abroad. You will be investing in your lifestyle but also mitigating currency risk.
The only sensible suggestion is to ensure that anyone who is considering a move, retirement or investment get in touch with someone who is up to speed with the changes occurring in the respective markets, and who has an overview of all key components required for a decision-making process: immigration; real estate; taxes; currency; accommodation rental versus real estate purchase…as a starting point.
In a volatile world, we think there is no greater value than reducing uncertainty, Portugal is a great place for investment and retirement.