The German financial regulator ("BaFin" – Bundesanstalt für Finanzdienstleistungsaufsicht) has recently issued the long-awaited draft guidance (ref.: WA 42-QB 4100-2016/0005, Erwerbbarkeit von Immobilien-Gesellschaften für Immobilien-Sondervermögen, "Guidance") on what structures can be used by international and German real estate funds for downstream investments whereby such investments still continue to satisfy the so-called real estate quota requirements of German regulated investors, namely only to invest in so-called "real estate companies" (Immobilien-Gesellschaften). For many funds targeting German institutional investors such as pension schemes (Versorgungswerke) and pension benefit plans (Pensionskassen) the question is of great importance as they have stipulated in their investment criteria to comply with the real estate quota requirements, that is to invest only in vehicles qualifying as real estate companies (Immobilien-Gesellschaften).

The Guidance is the response to clarification sought by fund managers on the use of trusts and AIFs as real estate holding vehicles. The use of such vehicles is key to an efficient downstream investment, for example by using MITs for Australian or OPPCIs for French real estate. BaFin's position as outlined in the Guidance is the result of intensive and almost year-long discussions between BaFin and fund houses.

In the Guidance BaFin concludes:

  • AIFs could classify as real estate companies if structured in corporate form. Thus, contractual AIFs such as the German special fund (Sondervermögen) or Luxembourg FCP (fonds commun de placement) might not classify as real estate companies.
  • Eligible AIFs must provide both membership and profit-sharing rights to the investing fund. Where the rights provided do not include direct membership rights, membership rights provided via an interest in a trustee or general partner of the structure would suffice. Thus, BaFin acknowledges for the first time the principal eligibility of trusts such as the MITs as real estate companies.
  • The investing fund must be able to exert "control" over the real estate vehicle in a manner that allows taking key decisions such as investments, disinvestments, taking on loans and the appointment and removal of managing directors. Control in that sense, in particular, is deemed to exist where the fund is the sole investor in the real estate vehicle. Where such deemed control is not apparent, nevertheless the relevant vehicle can be acquired as a deemed minority interest subject to certain thresholds applicable to German funds. However, where fund rules permit those thresholds can be waived to facilitate real estate vehicle acquisitions.
  • Eligible AIFs in any event must comply with the general requirements of real estate companies (Immobilien-Gesellschaften) such as having a sufficient narrow corporate object.

The position taken by BaFin has been positively received by German fund managers as it provides sufficient clarity to continue using classical investment structures such as the MITs or OPPCIs, subject to certain conditions. Some fund managers have been relatively dormant in recent months on certain markets pending BaFin's draft guidance however a resurgence of activity can be expected using such structures.

The Guidance is now under further consultation with German industry bodies with formal guidance to be expected in due course.