Last month, the UK's new Chancellor of the Exchequer Alistair Darling did nothing to become a sweetheart to private equity GPs. In his first pre-Budget Report, Darling announced he was scrapping 10 percent taper relief on carried interest.
In the UK, private equity executives, and by definition real estate pros who share the same fund management model, have enjoyed taper relief of 10 percent on capital gains. However, from April 2008 that will be replaced by a flat rate of 18 percent on all capital gains or carried interest, in the case of private equity.
The move came in response to a row in Britain over the tax treatment of private equity executives compared to those in vastly less remunerated work. Earlier this year, the issue became controversial because Nicholas Ferguson, chairman of UK fund of funds SVG Capital, said regulations allowed highly paid private equity executives to pay “less tax than a cleaner.”
The taper relief was introduced by Prime Minister Gordon Brown during his first budget as Chancellor in 1997 when Labour came to power. It was an attempt to encourage entrepreneurial wealth creators, but it also became a generous incentive to private equity pros.
Richard White, tax partner in the real estate alternative investments group at KPMG, said: “Real estate funds will tend to follow the typical private equity model in that key individuals will participate in a carried interest in the fund. This would normally be structured so that the disposal of their interest would give rise to a capital gain which was subject to Business Taper Relief, and therefore, only taxed at 10 percent. As such, the abolition and the introduction of a flat 18 percent capital gains will have a negative impact on the post tax returns for such individuals.”
From April next year, the UK will have higher capital gains tax than Italy with 12.5 percent or the US on 15 percent. Switzerland has no capital gains tax whatsoever.
However, the rate is still lower than Germany and France where private equity real estate managers have also amassed. The country now closest aligned with the UK is Spain where the rate is the same.
Heitman raises Russia and Ukraine fund
Heitman has closed its latest real estate vehicle, Russia and Ukraine Property Partners, with a commitment from GE, marking its foray into the two countries, although the firm has a long history in Eastern Europe (see a profile of Heitman on p. 26). According to Heitman, the vehicle has firepower to acquire $450 million (€315 million) of assets with leverage over the next 12 months. Focused on “high quality” real estate projects, the vehicle aims to invest in existing and planned residential and commercial property projects in the developing regions. Gordon Black, Heitman managing director for Europe, said, “We're very excited to be entering the property markets of Russia and Ukraine at this important stage of their evolutions.” The US firm has invested $5 million in the fund alongside three existing investors in previous funds, notably GE Real Estate.
Invista invests £25m into opportunity fund
UK listed real estate investment manager, Invista, has committed £25 million (€35 million; $51 million) to the Invista Real Estate Opportunity Fund. The firm announced the investment as it had first close on the vehicle that is targeting opportunities in the UK and Europe. The fund said it would invest in a mixture of direct property, indirect property, debt and equity securities, developments, joint ventures and corporate real estate backed opportunities with a target internal rate of return greater than 15percent on a compound annualised basis. Duncan Owen, chief executive, said the fund was a complement to its existing range of core and core-plus products.
Bank of Ireland to raise retail fund
The Bank of Ireland has revealed plans to raise up to €150 million ($213 milion) for a European retail property fund. The vehicle is to be seeded with more than €1 billion of property that is being acquired by Bank of Ireland Private Banking, which will manage the vehicle. Assets include a retail park in Liverpool and a shopping centre in Zaragoza, Spain. Peter Collins, director of private banking, said in a statement: “We believe that the European retail market represents a good opportunity for clients, with strong consumer spending in many markets. Combining this with the structural under-supply of quality shopping space should result in strong rental growth, driving the value of retail properties.” The fund will focus on dominant retail parks and shopping centers in major urban areas, he added.
Aberdeen closes fund of funds on €121m
Aberdeen Property Investors has held a first close on its second closed ended European fund of funds, Aberdeen Indirect Property Partners II (AIPP II) with commitments of €121 million ($172m). Aberdeen launched the first European fund of funds vehicle in 2005 raised equity commitments of €623 million. Both funds are managed by Aberdeen Property Investors Indirect Investment Management (API IIM). Similarly to its predecessor, AIPP II is targeting an annual internal rate of return of between 10-14 percent. The fund is expected to close around October 2008, unless fully subscribed earlier.