Luxembourg
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon

Towards the end of 2015, the Association of the Luxembourg Funds Industry (ALFI) was busy, in conjunction with Ernst & Young, surveying real estate funds domiciled within its borders. By mid-January, the results were out, and ALFI was, quite understandably, singing the results from the mountaintops.

The report notes a continuing increase in the number of real estate investment units in Luxembourg—that is, the number of single funds plus sub-funds of umbrella structures. Units totalled 309 at the end of Q3 2015, compared to 303 at the end of 2014 and 279 at the end of 2013.

Although increasing, these figures aren’t especially significant until compared to pre-crisis figures. At the end of 2006, 64 real estate investment units were domiciled in Luxembourg, while back in 2001, the jurisdiction was home to a mere 10.

Net assets under management in these funds increased accordingly, from €615 million in 2001 to €8 billion in 2006. However, between 2013 and 2015, while the increases in fund units were fairly modest, assets under management saw much more significant jumps, suggesting that these fund vehicles are not only attracting more investors, but larger investments, too.

At the end of 2013, assets under management in real estate totalled €30.5 billion. At the end of 2014 that figure had increased to €33.9 billion, and by Q3 2015 it sat at a massive €40.5 billion—an increase of €6.6 billion, despite Luxembourg only gaining six new fund units.

Kai Braun, a partner and alternatives advisory leader at Ernst & Young, says the increase is simply a continuation of Luxembourg’s success in alternative investment funds, following on from the success of the UCITS regime.

He calls Luxembourg an “international hub”, known for its ability to welcome investors from different jurisdictions and to facilitate cross-border investments. However, he also puts some of the success of the last few years down to the introduction of the Alternative Investment Fund Managers Directive (AIFMD).

He says: “Luxembourg is known as a regulated place and as an onshore market within the EU. Therefore, since AIFMD has been in place that has probably enhanced that image. There’s investor demand for regulated vehicles, and Luxembourg is the obvious choice for that.”

Appropriately, the ALFI real estate investment fund survey was extended for 2015 to include manager-regulated alternative investment funds—those funds not established under a regulated fund regime, but formed under corporate law, for which the manager will typically be regulated under AIFMD.
A PwC report released in November 2015, Choosing an Investment Vehicle, European Real Estate Fund Regimes, highlights the effects that AIFMD has had on the industry, and on the actions of investors.

The report reads: “AIFMD has forced fund managers and investors to change their approach and look not only at national rules, but also at EU rules and guidelines.”

“At the same time, the new passports for professional investor funds provide new options. Managers must consider the place where they apply for authorisation to obtain the licence, paying close attention to legal aspects, tax aspects, and available business infrastructure and personal resources.”

“While AIFMD clearly seeks to pave the way for a single market for real estate collective investment vehicles, differences and imperfections in tax regimes form a barrier for real estate funds investing on a pan-European basis.”

The PwC report highlights the variety of real estate investment vehicles available in Luxembourg. Real estate undertakings for collective investments (UCIs) are noted for their flexibility, including in terms of supervision.

They are also well known by international investors and arguably offer the highest levels of investor protection. However, UCIs require investors to use a depository bank, and managers need an alternative investment fund manager licence—it is also noted that a stricter regulatory regime may not be a positive point for all fund managers.

The second vehicle option, specialised investment funds (SIFs), were adopted into law in 2007 and intended to expand the scope of investors to encourage investment from “professional and sophisticated” investors, according to PwC. Also using well-known fund types, SIFs offer even more flexibility, and use a particular type of legal form that allows fund managers to exercise more influence.

Finally, the report highlights the SICAR, a risk capital investment company (or société d’investissement en capital à risque), which have no investment restrictions but only allow one investment, and which are only available for “opportunistic” real estate funds, and securitisation vehicles, which, although flexible, cannot be used for direct investment into real estate.

When pan-European regulations such as AIFMD come into play, being able to offer such a range of investment vehicles, and with sub-sections also available under these vehicle types, Luxembourg boasts more than its fair share of investment options.

Braun says: “AIFMD is about having a level playing field, and there shouldn’t really be major differences between the different jurisdictions. Luxembourg is known for having a very pragmatic approach when implementing European directives.”

“Luxembourg has a very developed toolbox of different vehicles, with different ways of structuring investments, depending on what the investment manager wants to achieve.”

“We can’t change regulation that comes from a European level, but we can change the way we accommodate fund managers in our jurisdiction, and having a variety of different vehicles available is a very powerful tool for Luxembourg.”

The report also suggests an ongoing trend towards simplification in investment strategies, specifically in geographical focus.

At the end of both Q3 2015 and Q4 2014, 40 percent of respondents said their funds focused on a single country, an increase on the previous two years, which saw 27 percent (2012) and 35 percent (2013) opting for this strategy.

However, when selling internationally, the majority of funds, 54 percent, are sold in to two to five countries. About a quarter, 26 percent, focused on a single country, while 20 percent sold into six countries or more.

The ALFI report said: “The expectation is that cross-border marketing under the AIFMD will further expand the reach of Luxembourg real estate funds and it will be interesting to note these results over the coming years.”

Braun concludes that Luxembourg is becoming more of a centre of attention for investors into alternatives, especially from offshore investors that are now unregulated. He says: “Investors are looking for regulation, so investment managers are setting up their funds in regulated centres. Luxembourg is clearly a European hub for that.”

The jurisdiction is seeing increases in investment in alternatives, and, Braun says: “Unless there is a major economic change, I don’t see why that trend would stop.”

He adds: “People are likely to invest more in alternatives, rather than less—especially in real estate.”

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