Editor’s note: This guest post is an analysis piece by Hakan Kodal, taking a look at how you can benefit as a Golden Visa investor in the post-COVID economy. He's the chairman of Optylon Krea, one of a leading investment management companies in Portugal, particularly in real estate investments and €350K Portuguese Golden Visa investment funds (see NEXT Fund). - Thomas
COVID-19 has taken the world by storm, and just like it attacks the weakest spots in a human’s body, it’s attacking the weakest spots in economies, both personal and national. For most Golden Visa seekers, the perceived impending chaos is a trigger to accelerate their plans and this will for sure create asymmetric demand in which it will be extremely hard to evaluate the fair market price of especially direct real estate purchases. As investors want to capitalize on the downturn, they often overlook the fact that they need to understand the supply-demand mechanism of the market they are trying to profit in.
Why it’s not that simple to capitalize on the downturn of the markets when it comes to Golden Visa:
Before explaining how to turn the crisis into an opportunity, we would like to explain the mechanics of the investment immigration market and how related players act to the potential investors. We believe the first step of making a profit in any sort of investment is to make sense of the players and their potential reactions to the ebb and the flow of the markets. Let’s do an overview of the drivers of demand for the Golden Visa products:
Increasing Authoritarianism – Almost all governments will use the “necessities of dealing with the pandemic” for a more centralized and heavy-handed administration. A striking example of this is Hungary, a country that has essentially shelved democracy and will be ruled with “unlimited power for an indefinite time to address the COVID-19 emergency”.
Extreme Income Disparity – Most people who are applying for the greener pastures of Golden Visa countries come from countries that are plagued by extreme disparity. The reason the affluent Golden Visa buyers are extremely worried about disparity is that it sooner or later puts them at gunpoint, literally. In specific cases such as Brazil and South Africa, this disparity translates into extreme amounts of violent crime. At the beginning of the worldwide crisis, the Independent made an eerily accurate statement claiming “The virus will bankrupt more people than it kills and that’s the real global emergency”. This will certainly translate into crime in the entire world, creating further push into conventionally “safer” countries offering Golden Visa.
Increasing fragility of developing world economies – For the countries, that weren’t saving for a rainy day the implications of the crisis will be severe. It has the potential to translate into harsher taxes for the affluent as well as reduced income from financial and real assets. For the emerging economies, COVID-19 already came in the form of a “tax” in the form of the total hammering of their local currencies. The currency crash was felt the harshest in South Africa, Mexico, and Brazil. For the sake of creating sustainable income, GV countries mainly those using the euro and the US dollar with their perceived safe-haven status are becoming increasingly attractive.
The above factors are the most prominent demand-generating factors that are affecting the Golden Visa markets and as such, they are not hampered but fueled by the COVID-19 Crisis. This of course creates a very complex investment model that is not very easy to navigate for the uninitiated. While the current economic downturn pushes asset prices down, the increased demand for Golden Visa-eligible investments creates a medium that makes it extremely hard to put a value on investments, especially the conventional real estate investment.
We have a bullish view on the COVID-Rebound of Portugal and here is why:
In the past 4 years, Portugal has made a name for itself as a “safe-haven” country due being a low crime, low conflict, and low authoritarianism country. This trifecta made Portugal the 3rd ranking country in the Global Peace Index. The shrewd country-branding practices carried out together with becoming an attraction point for start-ups moved this reputation even further while diversifying the already booming economy. While the economy will certainly take a hit in the short run, there are some good news for the Golden Visa investors as they will have to hold onto their investments for at least 5 to 6 years. When the time for exit comes, they will be in a better position than today for sure but in addition to that, they have a much better chance to liquidate when compared to a lot of other countries mainly due to Portugal’s so great performance in combatting Covid-19 so far.
Let’s take a look at the COVID-19 performance of Portugal for a second:
Better management than Spain, UK, Italy and France since the government acted much faster in imposing restrictions.
No total lockdowns were necessary because of the compliant and careful public.
As a result, no horror movie situations seen in the health system which acted as a very robust wave-breaker.
No psychological worries in food sustainability, Portugal is huge on agricultural and fishing products.
The convincing COVID-19 management so far combined with the pull factors becoming even more important Portugal is en route to a faster than average “V-Shaped” economic rebound.
So is there a magic bullet to take advantage of the potential market downturn while investing for my Golden Visa?
Short answer, no. Success in international investment has always been rough for individual investors and the answer is simple, either invest in something you have absolutely perfect understanding in or team up with professionals that have an impeccable and long track record. As we will share our formula for success in our webinar mentioned below, we want to share four major pitfalls we think investors should absolutely avoid while making a decision for their Plan B investment.
Avoid betting on investments that offer long term “guarantees”: We have been managing/advising investments aggressively in multiple countries for the past 26 years and have provided very satisfying results for institutional as well as individual investors but nowhere in our careers we have been able to “guarantee” returns. We can “project”, we can “expect” but guarantees are very superficial and from our perspective ruin the credibility of the developer or the investment advisor. In the investment world, there are no guarantees as the guarantees go as far as the ability of companies providing the promise to fulfill the payments. As markets become increasingly volatile, we advise to check the long term supply-demand of the proposed investment as it’s one of the most crucial indicators if the investment is a good one or not.
Investing with a clear and achievable exit strategy in mind. Some potential investments look very alluring on paper. For example something like a downtown T3 residential unit that has 3D images that “pounce on you” that you can also spend the summers in. It looks like a steal as it’s right next to the city center. Well, you just dug yourself into a hole investment-wise as it’s next to the city center in the “wrong” direction where prices are sure to plummet and liquidity is extremely low. You need to make sure there is liquidity in the area you are investing in as the first point of making a profit is the ability to convert your investment into cash. For those chasing the 350.000€ investment fund route, this also applies. The same residential units inside a fund, if they fall into the same trap mentioned above, will be horribly hard to liquidate at the end of the investment period, translating into lower returns for the investor.
Investing in something that is easy to understand and is clearly outlined by the sellers/promoters. These apply to the investment fund route mentioned above. We don’t want to single out competing funds by giving a direct example here but let’s try to work through a hypothetical example here. Let’s say a fund that is claiming it will invest in Spacefaring enterprises that is operating from Portugal. It certainly looks like the investment of the future but it’s highly unlikely that an investor will have dependable knowledge on the best performing space travel companies in Portugal or if the fund in question has the right management to make sense of this issue. The best way is to invest in something that is easy to understand. Moreover, the fund option has another pitfall that can come back to bite the investor when it’s time to reap the benefits of their investment: an unclear pipeline that wasn’t declared by the promoters. Of course, due to the nature of the investment, some decisions might change while managing a fund as such some of the investments on the pipeline will never be made. But if there isn’t a pipeline declared from the beginning, it gives an extremely bad signal. Making it up as you go is not an option when it comes to delivering value from a fund investment.
Avoid circumstances that can lead to fraud: This is coming straight out of the “ten commandments” of the famous SEC guide “Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions”. Unfortunately, ill-natured people thrive the most in such turbulent times. We advise all investors to research the players inside any investment organization including but not limited to real estate developers, fund investment advisors/promoters, legal firms, brokers, and golden visa consultants and always ask for credible references and cross-check. And as always, never forget the magic formula “if something is too good to be true, it is”. Cross-checking the information provided by brokers/developers with eligibility letters provided from multiple reputable law firms is a surefire way to avoid being misled.
We wanted to take this chance to explain to potential Golden Visa investors the intricacies of the market as a whole and explain the major pitfalls. But of course, there is more we would like to share. So what makes the Portuguese Golden Visa so special in the Post-Covid world? What is the optimal route to getting the Portugal Golden Visa?
Source: nomadgate.com / May 12, 2020 / Contributor: Hakan Kodal