Property investors have been happy working with minimal regulatory control for property investments using limited partnerships, unit trusts and companies and both onshore and offshore entities but all that is about to change. The E.U.’s Alternative Investment Fund Managers Directive (AIFMD) has been staggering through the E.U. regulatory process and is expected to be published a little later this summer (later than advertised) and to be fully in force in 2013. EU managers of property investment funds are going to have to be authorised, work with liquidity controls and restrictive borrowing powers, have to defer their remuneration and will have to appoint an independent depository for each fund that they manage.
The AIFMD will require the following -
- Authorised fund managers - Most property fund managers are not authorised by the FSA at present but they will need to be. This will apply to all existing managers subject to some very limited exceptions. The administrative burden and time involved should not be underestimated.
- Use of substantial leverage - will have to be disclosed to regulators who may impose limits on borrowing.
- Liquidity management - systems will be required in a more formalised way than it is usually done today.
- Remuneration - the management personnel’s remuneration is controlled by AIFMD and some managers may be pained to note that 40% of bonuses have to be deferred for at least 3 to 5 years!
- Depositories - in an effort to safeguard investor’s funds, following all the horror stories for the last few years, managers will be required to appoint an independent depository for each fund to ensure cash flow is properly managed, for the custody of financial instruments, to verify the ownership of assets including properties and the special purpose vehicles acquiring the properties. The independent depository has to sit alongside the existing property manager, the fund administrator and any other service providers to the fund and will be involved in the process of formalising transactions. This is a new concept for managers of property funds.
- Marketing – E.U. managers managing E.U. funds will have the benefit of a passport allowing them to market the funds throughout the E.U. Consultations are underway about extending this to non E.U. managers. There will be some interesting issues for those involved in tax havens falling outside the E.U. but we await the definitive picture of what will happen.
Many managers of real estate for investors will be surprised by the breadth of the AIFMD and should start to consider how the AIFMD might apply to them.