UK property industry associations are speaking out against a draft European directive which will have a serious impact on the way private equity real estate funds are regulated and operate.
The Association of Real Estate Funds, which is a London-based organisation representing UK unlisted funds, has written a letter to the UK Treasury arguing that the directive on Alternative Investment Funds is aimed at protecting investors and reducing systemic risk, and therefore some parts of the directive should exempt property funds if they poses no such risk.
“It is clear that the directive is politically charged,” continues the letter, adding it is vital that the Union “recognizes that the European real estate investment fund industry had nothing to do with the origins of the credit crunch,” namely the US residential market and complex securitized investments linked to that market. The seven-page letter goes on to make detailed points about specific aspects of the proposed law.
The second UK industry body speaking out is the Property Industry Alliance (PIA), made up of the British Council for Offices (BCO), British Property Federation (BPF), Investment Property Forum (IPF) and Royal Institution of Chartered Surveyors (RICS) – all of which are asking for an overhaul of the regulation.
The directive was unveiled by the European Commission in March, but the property industry has been slammed for being slow to respond. Some professionals in private equity and private equity real estate as well as law firms in London have privately voiced concern to PERE that there has been a lack of co-ordinated response. Some sources suggest that those involved in the private equity real estate either do not understand the far reaching implications of the regulation or are pinning hopes on it being watered down.
If passed later this year, the directive will require European Union member states to impose regulations forcing fund managers to comply with a whole series of burdensome red tape, from authorisation to maintaining capital reserves.
In terms of capital reserves, fund managers would have to keep €125,000 or a quarter of their annual fixed costs, whichever is higher, as well as 0.02 percent of funds under management above €200 million.
Risk management and portfolio management teams will also have to be separated. Independent valuers must be appointed for each vehicle at least once a year, while each fund must appoint a “depositary” which must be a bank to receive payments from investors and act as custodian, and managers will have a duty to report to investors the total leverage each quarter.
It will be open to the European Commission to impose limits on the amount of debt for funds too. Adding to the burden, managers will need authorisation each time they want to outsource a fund management function. Managers will also have to disclose the precise identity of investors that receive preferential treatment.
The far-reaching directive will also force funds whose strategy is to acquire a significant stake (more than 30 percent) to notify the company and all other “stakeholders” of “development plans” for the company. If a manager wants to market a fund it will have to notify its domestic financial regulator and provide all the information to be given investors. If the fund is domiciled outside the European Union, there will be a three-year delay in being allowed to market a fund.
The directive applies to all fund managers with more than €100 million of assets if leverage is used, catching most private equity real estate firms.
By way of contrast to the property industry, associations representing private equity firms have been quicker to respond, though they have also been criticized for not opposing the directive strongly enough during its drafting stages.
Both the British Private Equity and Venture Capital Association (BVCA) and the European equivalent, have spoken out.
Earlier this month, Sweden took up its six-month leadership of the European Union and gave some grounds for optimism that the directive might get watered down.
“There is an exaggerated fear that private equity contains big systemic risk,” said finance minister Mats Odell. “Our opinion is that it does not.” Sweden is understood to want to get the directive ratified during its tenure, before the presidency and the associated power to redraft the directive is passed to Spain.