The worries of success

No doubt Luxembourg’s real estate investment fund (REIF) sector is booming as investors seek to mine new opportunities. But as the fund business expands, so do concerns about keeping pace with this growth, particularly complying with tax and regulatory requirements in different countries.

According to the Association of the Luxembourg Fund Industry’s 2018 REIF survey (PDF), during the 18 months to 31 June 2018 the number of funds in this sector has grown by about 15%. The survey looked at 304 vehicles: an increase of 45 over this period. The implications of this are clear, even if is difficult to measure the assets under management for this asset class give the nature of property investments.

Keith Burman, co-chair of the Alfi Real Estate Investment Funds Sub-Committee, said: “This year’s survey confirms that Luxembourg remains the favoured location to establish and maintain multi-geographical and multi-sectoral regulated REIFs, which continue to appeal to institutional investors and fund managers from around the world.” Retail, residential, and office building investment are all strongly represented.

Market strains

The signs are strong, but out in the market strains are beginning to show. “Investment yields are historically low, and in the eurozone it is hard to see this changing given how low interest rates are and how tight margins are,” noted Chris Staveley, director EMEA capital markets with the property firm JLL. He was the first speaker at the second day of the Alfi PERE conference on 21 November; the day dedicated to real estate funds. He suggested there might be a change in the UK, where interest rates are rising and low exchange rates have encouraged investment, largely from Asia. However with monetary policy having tightened in the US, change could be in the offing there.

Adjusting to changes

There followed a panel which debated “What keeps RE asset managers up at night?” “Taxes are always changing where we make our investments and that is tricky to keep on top of,” said Margaret Fitzgerald of the real estate investment firm Hines. For example, an investment might look good when it is made, but this can change if national governments decide to reform the rules. This will often require investment restructuring and it’s not always easy to get this right. Indeed Sébastien Herzog of Axa Investment Managers said his firm now had distinct tax compliance functions to keep on top of these challenges.

However the one part of the equation that can be relied upon is Luxembourg. Political stability ensures regulatory and tax stability for where the fund is domiciled. “Asian investors are deep fans of Luxembourg because it is a stable, predictable base,” said Christoph Schumacher of the bank Credit Suisse. “When I say I am going to use Lux, investors are pleased as they know it whether they are in Latin America, Asia or anywhere. It’s one less worry.”

There was also some love for the EU’s AIFMD regulatory regime. “Investors like regulation,” said Fitzgerald, due to the reassurance it provides, with the Luxembourg financial regulator CSSF’s “bottom up” approach seen as being effective. “AIFMD is a benefit when viewed from outside the EU in terms of capital raising across Europe,” added Herzog.