Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities of and other developments in MoFo’s European Real Estate team. In this edition, we consider the impact of the war in Ukraine on the European commercial real estate market as well as new transparency measures introduced by the UK government in response to the conflict.

As always, we hope you enjoy reading MoFoReal and welcome your feedback and suggestions for future issues.

Real estate and the war in Europe

Reflecting on the last quarter, it is difficult to ignore the ongoing war in Ukraine, another event with worldwide impacts.

While it was great to see so many familiar faces at MIPIM – and to enjoy a bit of social normality – there were frequent reminders of the enduring challenges presented by the pandemic and the invasion unfolding on the other side of the continent. Unsurprisingly, often the talk turned to how the war will affect the European real estate market.

The market

Investment and leasing activity generally remains buoyant. On the investment side, this is likely in part thanks to the cash reserves or “dry powder” accumulated by both debt and equity investors, and also as a result of inflationary pressures that are tempting investors towards real estate given its potential for inflation hedging. We touched on these points in our last newsletter in relation to our projections for the market’s performance but we now expect to see activity shifting away from central Europe and towards more established markets, such as London, Paris and Switzerland, due to the perceived lower risks in these areas.

With that said, the picture is still uncertain. Surging inflation and supply chain issues are putting significant pressure on key stakeholders as the costs of development and interest rates are on the rise. As costs increase across the board, there is likely to be extreme resistance to rent increases from tenants (whether business or residential), and this will inevitably have an effect on investor yields, too. Further, the more protracted the conflict in Ukraine, the more unstable the European economy and market sentiment will become – and presently most reports suggest that the war is unlikely to be over any time soon. As such, trends in the real estate market will continue to develop.

New transparency measures

What is certain is that the events in Ukraine have reinvigorated the UK Government’s desire to ensure “dirty money” has nowhere to hide in the UK. Consequently, the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECA”) was expedited through the UK Parliament and enacted on 15 March 2022.

The ECA contains provisions on sanctions and, most notably for the commercial real estate industry, enhanced transparency measures for foreign entities that hold property in the UK. In particular, the ECA introduces a mandatory obligation to register the beneficial owners of all such foreign entities at the UK’s Company Registry, Companies House (the “Register”). The ECA also imposes an ongoing obligation to update or confirm the information on the Register every twelve months, similar to the existing obligation on English companies to file confirmation statements at Companies House.

Note that these requirements will affect all non-UK entities holding UK property, not just those that might have a connection with sanctioned jurisdictions or traditional tax havens. As most of our clients are international investors in one form or another, and often employ structures in which a non-UK entity holds the underlying real estate, this new obligation will require a response from most of them.

We don’t yet know when the obligation to register will come into force but, when it does, there will be a six-month window for compliance. After that window lapses, failure to register could result in criminal penalties (for both the foreign entity itself and its officers) as well as restrictions on buying, selling, and/or mortgaging property. Given these potentially significant consequences, and the time it may take to apply the new rules to complex holding structures (e.g., Jersey Property Unit Trusts (JPUTs)), we recommend analysing your portfolios sooner rather than later.