Being a European conference, the “B” word was on everyone’s lips, particularly with several key votes in parliament taking place during the week. It seems the challenges Brexit is posing are twofold.
Firstly, managers are reviewing their structures in light of Britain’s departure from the European Union; indeed Luxembourg seems to be the winner here, with over 250 AIFM’s now being authorised in the Grand Duchy. However, the Channel Islands continues to present a strong proposition, particularly for the 97% of managers who are marketing to fewer than three EU member states, and can continue to leverage NPPR effectively. One manager commented that the flexibility and responsiveness of the Channel Islands service providers will continue to be attractive to them for their prospective fundraise, particularly as the JFSC and GFSC have recently signed MoU’s with the FCA in case of a “No-Deal” Brexit, allowing their funds to continue to access UK institutional capital.
Secondly, the appetite for deals in the UK appears to have cooled in recent months. While a handful of managers are pursuing UK focussed products, many are taking a “wait-and-see” approach. Several attendees commented that they believe the UK is due a correction, particularly in prime Central London commercial assets. Despite this, some managers are preparing to take advantage of any distressed assets that may come to market, with retail leading the way in the number of potential discounted opportunities on the horizon. Outside of London it seems there is still value to be found, with good capital growth and strong yields to be found in regional UK. Popular assets discussed included hospitality and leisure, PRS, student accommodation and logistics.
The European Real Estate industry has seen a number of tax changes in recent months, which were regularly mentioned by MIPIM attendees. Of particular note are the changes in both the UK and Germany, where CGT and RETT respectively are providing challenges for managers and their advisors.
For UK investors, changes to CGT legislation come in to force on April 1st 2019, meaning that non-resident investors will now be taxed on gains arising from holding UK property. In the first instance, valuations will be rebased from this date, so asset owners are hastening refurbishment, rent reviews and re-gearing of leases ahead of the April deadline. Second to this, HMRC has now announced both a transparency and an exemption election for Collective Investment Vehicles (“CIVs”) allowing funds to avoid double taxation subject to certain conditions.
In Germany, the proposed reform to the Real Estate Transfer Tax (“RETT”) legislation will mean a reduction in the share deal threshold from 95% to 90%, and an extension of the lockup period from 5 to 10 years. No formal deadline has been agreed yet, but several tax advisors mentioned that this is one of the leading topics they are keeping an eye on for future deal structuring in the region.
Since the 2008 GFC, alternative lending has become an increasingly large part of the Real Estate asset class, growing from 5% to and estimated 35% of the debt market. Sitting higher in the capital stack, debt fund investors often seek to diversify their allocations while seeking downside protection, a play becoming ever more common as equity investment returns experience increased compression. The market has seen a boom in refinancing of late, with both traditional and alternative lenders keen to deploy.
The investor sentiment towards debt funds seems to have shifted from an opportunistic view, to one that is consistently measured up against pure equity strategies. With an average IRR of 10.8% since the crisis, vs 12.2% for Core equity strategies (source: Preqin), the appeal of Real Estate debt is clear. Multiple people at MIPIM commented that we are long overdue a correction in valuations, particularly considering where we are in the cycle, and so debt strategies provide some downside protection against this.
With a different strategy of course, come different challenges, when designing a flexible, tax efficient structure. Indeed, we have seen managers employing listed debt securities as part of their fund structuring, on a number of European exchanges – most notably the TISE and the Euronext, to leverage on WHT exemptions. Structures like these require experienced advisors, to ensure smooth execution and seamless deployment.
As an award winning global provider of tailored solutions to the Real Estate industry, Vistra is able to assist our clients in navigating the challenges discussed in this article. Please get in touch to find out how we can assist further.
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