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Property industry urges caution despite winning key concessions in EU hedge fund battle

Property companies and joint ventures could still be caught up in European Union legislation designed to tackle perceived risk-taking by hedge funds, despite a series of key concessions secured by the property industry.

The British Property Federation today warned that the complexity of the Alternative Investment Fund Managers (AIFM) Directive, which was expected to be adopted following a vote in the European Parliament today, means that the entire corporate property sector could still be caught in its scope when the directive is interpreted by European regulators.

This would see property companies – from the largest Real Estate Investment Trust (REIT) down to modest family firms – face massive administration costs, reduced investor returns and could force smaller real estate companies out of business.

It could also have other knock-on effects on the industry. Emerging EU regulation on derivatives will also apply to anyone caught by the AIFM Directive – causing up to 65bn EUROs of “collateral damage” to the sector (see notes to editors below).

The warning came despite a series of key concessions won by the BPF, working with the UK government and other industry groups, which should mean that property companies and joint ventures will be excluded. Property funds will still be included within the AIFM, as the EU intended.

Peter Cosmetatos, finance director at the British Property Federation, said: “After months of frantic lobbying, we have secured an exemption for ‘holding companies’ which should confirm that most corporate groups are outside its scope.  We also have a clarification that joint ventures are not intended to be caught by the Directive.  These are great successes, reflecting the efforts of the UK government as well as persistent lobbying by the British Property Federation. 

“But it could all still go horribly wrong. Adoption of the Directive is not the end of the road.  Many vital aspects of the new regulatory framework were so politically or technically challenging that the Directive did not really deal with them. Among those is the status of corporate property groups and of joint ventures.

“The position remains uncertain because it is not clear how the Directive’s definitions of ‘alternative investment funds’ or ‘holding companies’ are to be interpreted – the European Commission has previously suggested that typical REIT group businesses and the activities of typical property investment joint ventures should be in scope.”

Before the UK and other member states transpose the Directive into national law, European regulators will sit down with the European Commission to provide guidance, as well as various implementing measures, to flesh out the bones of the Directive. The Directive’s scope and whether ordinary property investment companies and joint ventures are caught may or may not be clarified during that process.

Martin Wood, group head of tax & treasury and insurance for Land Securities, added: "The progress the property industry has made on the AIFM is a testament to the way the industry has worked together. However, while clarity remains blurred on what the final directive will look like, we need to continue to work together to ensure the property industry's voice is heard loud and clear."

While many property fund managers are broadly content to be covered by the AIFM and to benefit from the EU marketing ‘passport’ it provides, they were today urged to remain engaged as regulators work out how to implement the directive.

John Forbes, real estate industry leader at PricewaterhouseCoopers, said: “The period between now and the Directive coming into effect will be crucial and it is important that real estate fund managers contribute to the lobbying process.  Much of the detail of the matters covered by the Directive will be dealt with through regulation.  

“Some of this will be drafted at a pan-European level but will be implemented locally.  Other areas, for example the treatment of retail investors, are expressly delegated to local regulators. It is important that real estate fund managers engage with the various real estate trade bodies that are discussing the Directive with the FSA.”

Notes to editors

The definition of an Alternative Investment Fund Manager in the AIFM Directive will be used to decide which companies should be caught by the European Commission’s proposed European Market Infrastructure Regulation (EMIR) released last month.

These proposed EU rules on derivatives could take an estimated EUR 64.9 billion of working capital away from Europe’s real economy as property businesses risk being required to collateralise their interest rate hedges with cash. This is the main conclusion of a Chatham Financial study commissioned by the European property sector.

One of EMIR’s core requirements is that businesses deemed to be ‘financial’ entities must post cash collateral into margin accounts to provide cover for a ‘central counterparty’ in the event of default. ‘Non-financial’ businesses, which use derivatives for hedging commercial risks associated with a normal operating business, are rightly excluded from these requirements. EPRA is concerned that, absent urgent clarification, property businesses, (which use interest rate swaps to protect against fluctuating interest rates), risk being misclassified as ‘financial’ and being subject to onerous central counterparty margin calls designed for entities which speculate with derivatives rather than ordinary businesses that use interest rate swaps for risk management.

The fears arise because the European Commission’s view of what is a ‘financial’ is still uncertain and needs urgent clarification, according to EPRA. The Regulation’s definition of ‘financial’ refers to “alternative investment funds as defined in the AIFM Directive”, but a number of important interpretation issues remain unresolved – including whether property businesses fall within the AIFM directive and hence within the new derivative rules.

For further information or to organise an interview please contact:

Peter Cosmetatos, Finance Director, the British Property Federation at pcosmetatos@bpf.org.uk, or on 020 7802 0115

Patrick Clift, Media and Public Affairs Manager, the British Property Federation at pclift@bpf.org.uk, or on 07834 439 505

Paul Sweeney, Media Assistant, the British Property Federation at psweeney@bpf.org.uk, 020 7802 0113 / 07841 732194