This article was sponsored by Jersey Finance. It appeared in the Fund Services Report alongside the September 2019 issue of PERE.
The asset management landscape has changed considerably in the decade since the global financial crisis (GFC). The effects of quantitative easing and a persistently low interest rate environment, as well as, in recent years, growth in high-net-worth populations in emerging markets and recognition in developed economies of an urgent need to respond to pension gaps, have all led to a rise in allocations to alternative asset classes.
This has translated positively for Jersey, where the value of fund assets serviced rose 10 percent in 2018 to reach a new record high of £320 billion ($397 billion; €357 billion), with alternatives representing 86 percent of total funds business in the jurisdiction. And while the expectation is that alternatives will continue to rise in popularity, it will not be without challenges.
As far as real estate is concerned, the indications are that appetite to allocate to the asset class remains substantial, but investors are modifying their behavior and are generally looking to put less money toward fewer funds than a year ago. In the long term, the indications are positive, with 36 percent of investors planning to increase their allocation to real estate, according to Preqin Investor Outlook H1 2019. In the shorter term, however, while 52 percent of investors are planning to make a single new commitment to the asset class over the next year, they also expect to commit less capital, suggesting a more cautious approach, as highlighted in Preqin, Quarterly Update, Real Estate, Q2 2019.
For fund managers, the year ahead looks set to be challenging in terms of fundraising – while a large number of new private real estate funds have been brought to market in the first half of 2019, almost one in five funds have been in market for more than two years.
From a jurisdictional point of view, understanding these subtle trends is vital. As managers respond to investor behaviors, fund centers will need to provide a stable platform that affords managers the flexibility they need in the short to medium term and that are forward-thinking enough to help maintain investor confidence in the longer term.
Jersey’s ability to offer a certain, global solution for servicing private real estate funds puts it in a strong position to support those needs.
Stability and simplicity appeal to managers
It is no coincidence that Jersey’s appeal has been heightened in the face of global uncertainty. It is precisely because of Jersey’s economic, regulatory and fiscal stability that managers and their investors continue more than ever to put their faith in Jersey – the value of real estate funds serviced in Jersey has grown by more than 70 percent over the past five years, according to figures from the Jersey Financial Services Commission (JFSC).
While interest rates and asset valuations remain big challenges in the eyes of investors, it is telling that for one in five investors, the geopolitical landscape remains a key concern too, according to the Preqin Investor Outlook H1 2019 report. Nowhere else is this more evident than in the context of Europe, as the UK continues to look for a political solution to its withdrawal from the EU.
Jersey has read the political climate prudently to the extent that stability has become one of its key strengths. As far as Brexit is concerned, being outside the UK and the EU but with strong ties to both, Jersey is able to bridge the gap between the UK and EU, regardless of the outcome of Brexit. As a result, the number of managers choosing Jersey to structure their EU-focused funds through targeted, cost-effective private placement grew by 13 percent last year, according to the JFSC. These are strong figures that sustain a growth trajectory Jersey has been seeing for some time.
A stable and straightforward fiscal base is vital too and managers have consistently found that Jersey’s tax-neutral model works very well for capital pooling. Jersey companies are taxed at zero percent while limited partnerships are tax-transparent, which is simple for managers and investors to understand. This compares well to other jurisdictions, where there is often a need for complex hybrid instruments or double taxation rulings to achieve similar results. Ultimately, it is simplicity that will resonate with managers.
Certainty in globally challenging times
Political and market uncertainty is, of course, not just restricted to Europe, and Jersey has seen increasingly that managers from markets further afield, including the US and Asia, are looking to futureproof their funds through a jurisdiction that can offer them long-term guarantees.
Managers must be ready to adapt to these subtle trends and being able to rely on a jurisdiction that can blend certainty of global market access with flexibility will be pivotal in enabling them to do so.
With real estate investors targeting predominantly developed markets in the months ahead, Western Europe is set to remain the most targeted region. However, according to the latest real estate quarterly update from Preqin, a substantial proportion of investors are seemingly shifting their geographic preferences toward North America.
This is one reason why Jersey Finance is launching a new office in New York this year – a move based on the conviction that Jersey can act as a high-quality, pan-Atlantic servicing location, offering a compelling proposition as a gateway into Europe for US managers. In fact, US promoters’ assets under administration in Jersey have increased by 148 percent over the past five years, according to Monterey.
While there is strong interest in the European market among US managers, there is not always a clear understanding of the EU’s Alternative Investment Fund Managers Directive (AIFMD) regulation, how the market works or the most cost-effective way to access it. With that in mind, Jersey’s message to US managers is that its private placement solution can provide them with quick, straightforward and cost-effective access to EU and UK capital and assets.
And because Jersey is outside of the EU, it offers an attractive level of flexibility if managers are also interested in targeting investor markets beyond Europe. Doing so from an onshore European location would be more costly and burdensome.
An innovative environment
Maintaining an ecosystem that is alive to the behavior of investors and the needs of managers against a backdrop of geopolitical uncertainty is absolutely vital, and Jersey is committed to achieving that by focusing on regulatory and digital innovation.
It is the case that robust standards of regulation are increasingly important to both manager and investor decision-making, and this has become a significant advantage for Jersey, which has in recent years scored extremely high on standards of regulation, featuring as a top-tier jurisdiction when assessed by global authorities such as the Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF) and the EU.
The introduction in January of economic substance legislation is a case in point – legislation that reflects Jersey’s ongoing commitment to nurturing a substance-driven environment for fund managers.
Meanwhile, Jersey’s focus on creating a digitally-led environment – the island has the world’s first full fibre telecom network delivering speeds of 1Gbps and is currently third in the world broadband speed ranking, behind only Taiwan and Singapore – means it is able to provide the sort of reliable, quick and always-on platform managers need. This advanced framework is positioning Jersey strongly as a fintech center on the international stage.
Jersey remains a compelling domicile choice for private real estate fund managers
The total value of funds serviced in Jersey stood at £320 billion ($397 billion; €357 billion) at the end of 2018 – the highest value ever – with real estate fund values growing 10 percent in the last 12 months.
There are more than 100 funds in Jersey focusing on UK real estate, according to Monterey.
In 2018, around 35 percent, by net asset value, of the constituent funds quoted on the AREF/IPD UK Quarterly Property Fund Index, made use of a Jersey structure.
Jersey is home to more than £600 billion in corporate asset vehicles and around 80 percent of that is invested in real estate with a strong emphasis on UK commercial real estate (Capital Economics).
Indeed, Jersey has a good track record when it comes to digital: it was home to the world’s first-ever regulated bitcoin fund; last year global crypto exchange Binance established an operation in Jersey; and applications for the Jersey Private Fund – rapidly becoming the go-to vehicle for institutional investors – went ‘online only’ in 2018.
Maintaining this sort of forward-thinking environment is vital. The long-term future for private real estate funds looks bright, but with market uncertainty and geopolitical instability threatening to disrupt the sector, those International Finance Centers (IFCs) that can provide managers with a stable, innovative and certain fund servicing platform have an opportunity to play a critical role.
Pragmatic response to UK tax change
Legislative changes relating to the application of capital gains tax (CGT) on the disposal of UK commercial property by non-UK investors came into play in April.
The legislation introduces new rules, designed to prevent the potential for multiple layers of taxation within a structure, that apply to collective investment vehicles investing in UK real estate – a ‘transparency election’ and an ‘exemption election’. Jersey offers a range of regulated structures all able to utilize these elections.
Joe Moynihan, CEO of Jersey Finance, comments: “The UK government has been pragmatic in finding a positive way forward on this issue. Overall, this response should give confidence to overseas investors and sends a clear message that the UK commercial real estate sector is an attractive future prospect and that Jersey remains a clear choice for channeling institutional-grade investment into the sector. In fact, the expertise Jersey can offer will be absolutely vital in supporting managers with the new rules and advising them around the options now open to them.”