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PERE Investor Forum 2018 – a few thoughts
It was great to attend and speak at this event last week in Amsterdam. With Fiona le Poidevin of The International Stock Exchange and Sophie Reguengo of Ogier, John led a session on choice of jurisdiction for real estate funds. The previous session Bartjan Zoetmulder, a tax partner at Loyens & Loeff, looked at many of the significant tax changes that will affect real estate. A number of the issues that he raised flowed through into our session on fund structuring. In particular, the OECD Base Erosion and Profit Shifting (BEPS) Action Plans have fundamentally changed the landscape for tax planning. We had a long discussion on substance that continued from the tax breakout through our fund structuring one. Two things were apparent from this. Firstly, the provisions are new and everyone is struggling to really determine the extent to which the Principal Purpose Test for Double Tax Treaties under BEPS 6 differs from the traditional attitude to “substance” requirements of many countries. Secondly, this does not necessarily align with the direction of travel for regulation under AIFMD. Changes to rules on the tax deductibility of interest, changes to the tax treatment of sales of shares in property owning companies and other changes under BEPS are significantly eroding the benefits of traditional pan-European fund structures. A fund of funds model investing in local tax advantaged funds and REITs may give a better tax outcome but often also comes with significant commercial and regulatory baggage.
Our session included discussion on the importance, or not, of the ability to passport marketing of funds under AIFMD. In considering this, it is important to focus on where AIFMD will be in a year’s time with the current changes underway and also the broader EU Capital Markets Union project coming to fruition next year.
The commercial environment is also changing significantly. In a long-term low return environment, with a focus on income and increasing transaction costs, a closed-ended model that involves selling assets and returning capital to investors often makes no sense. We are seeing more open-ended and permanent capital funds. This does not mean that closed-ended funds will disappear. The model makes perfect sense for opportunistic and other higher risk strategies with a fixed investment plan.
The changing nature of capital will also have a major impact on the real estate fund structures through which that capital invests. The real estate investment industry is built on providing an investment model designed for traditional retirement products that provide a defined outcome, defined benefit pension schemes and traditional on balance sheet life insurance product. These are in long-term decline and the industry must move towards a more “retail” client base.
The shift to a more “retail” product linked to the broader theme of this year’s conference – the impact of technological change. In our session, we considered the potential impact of blockchain and the use of Initial Coin Offerings as conduits into real estate investment for REITs and funds.
Our session was followed by one led by Kieran Farrelly of StepStone Real Estate looking at “innovative structuring: attracting diverse sources of capital”. Again the discussion flowed on from our session through into his.
John Forbes, 5th November 2018