In Short

The Situation: Due to strict investment rules governing German open-ended real estate funds, questions remained regarding whether those funds could indirectly invest in non-German real estate, via structures or vehicles qualifying as real estate funds.

The Development: Based on an interpretive decision by the German Federal Financial Services Authority, German real estate funds, provided they adhere to certain conditions, can invest in non-German real estate funds, including real estate trusts.

Looking Ahead: The clarification broadens the investment horizon for German real estate funds.

The German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin") clarified on April 9, 2018, in an interpretative decision, that non-German real estate funds, including real estate trusts, qualify as eligible investments for certain types of German real estate funds, provided certain conditions are met.

Until now, investors debated whether German real estate funds could, from a German/European law perspective, indirectly invest in real estate through structures or vehicles qualifying as real estate funds. In particular, the question arose in connection with any proposed investments by such German funds in non-German real estate funds and trusts.

The debate revolved around the strict investment rules applicable to German open-ended real estate funds in the contractual form (Sondervermögen), including real estate "Spezialfonds", the latter being reserved for, and widely used by, institutional investors. According to the statutory rules applicable to these funds, indirect investments in real estate could be made only through "real estate companies." Traditionally, real estate companies were set up in the form of limited liability companies and limited liability partnerships. This established practice raised a number of questions including, for example, whether a U.S. private REIT ("Real Estate Investment Trust") could also qualify as "real estate company."

BaFin has now clarified that the qualification of any vehicle or structure qualifying as a real estate fund from a German/European law perspective does not exclude the simultaneous qualification as a "real estate company," provided that certain conditions are met. One such condition dictates that the structure in question does not convey only property rights to the German fund, but also membership rights. Applied to trust structures, in the opinion of BaFin, this would occur if the German fund does not acquire only an interest in the trust but also in the trustee. An investment in the trust and the trustee must connect in such a way that both investments cannot be disposed of separately, but only in conjunction.

The welcome regulatory clarification potentially widens the investment horizon for German real estate funds. This should generally benefit the German fund's investors, and institutional investors in particular. Nevertheless, observance of numerous additional requirements must accompany an indirect investment by German real estate funds. This applies in particular with respect to certain regulated investors such as German insurers or pension funds. BaFin's interpretative decision covers only some of these requirements.

Four Key Takeaways

  1. A clarification by Germany's Federal Financial Services Authority confirmed that German real estate investment funds can invest in non-German real estate funds, including real estate trusts.
  2. However, numerous additional requirements must accompany an indirect investment by German real estate funds. This particularly applies to certain regulated investors, including German insurers or pension funds.
  3. One condition dictates that the investment structure under consideration must convey membership rights to the German fund, not just property rights.
  4. The interpretative decision does not cover all the requirements.