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CONSULTING LLP The return of the fund Opportunities and challenges for real estate investment management in 2016 and beyond Qube Global Software Customer Conference 8 October 2015
CONSULTING LLP
The return of the fund
Opportunities and challenges for real estate investment management in 2016 and beyond
Qube Global Software Customer Conference 8 October 2015
CONSULTING LLP
Total UK commercial property stock of £683 billon at 31st December 2013
2
The UK Institutional Real Estate Market
End 2012 End 2013
Investor type £billion % £billion %
UK insurance and pension 78 22 75 19
Overseas investors 76 22 94 24
UK Collective investment schemes 68 20 63 16
UK REITs and listed 50 14 55 14
Unlisted companies 38 11 53 14
Traditional estates / charities 13 4 17 4
Private individuals 12 3 10 3
Other 13 4 18 5
Total 348 100 385 100
44%56%
Owned by investorsOwned by occupiers
Source: Property Industry Alliance Property Data Report 2014. http://www.bpf.org.uk/sites/default/files/resources/BPF-PIA-Property-Data-Report-2014-are_0.pdf
Largest changes over 10 years 2003 2013 % change
UK Collective investment schemes 47 63 134
Overseas investors 73 94 129
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How we invest in real estate to provide for retirement
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changes
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How we invest in real estate to provide for retirement
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Increasing complexity
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How we invest in real estate to provide for retirement
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Life insurance companies and pension funds
CONSULTING LLP
How we invest in real estate to provide for retirement
Life insurance companies and pension funds
Multi- manager
Fund of funds
FundsJoint
ventures & club deals
REITs
7
CONSULTING LLP
How we invest in real estate to provide for retirement
Life insurance companies and pension funds
Multi- manager
Fund of funds
FundsJoint
ventures & club deals
REITs
8
The impact of regulation (especially AIFMD and Solvency II)
On 30 September, the European Commission released its Action Plan for
a Capital Markets Union
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changes
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How we invest in real estate to provide for retirement
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Lessons learnt from the crisis
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http://www.johnforbesconsulting.co.uk/aref-report
January 2012
Unlisted funds - Lessons from the crisis January 2012
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Interviews with:
• Representatives of AREF member funds;
• Members of the AREF investor committee;
• Others in the industry.
covering...........
Unlisted funds - Lessons from the crisis January 2012
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Key areas of focus from the Report
• Oversight of key decisions and independent representation of investors;
• Valuation policy and practice for both direct and indirect holdings;
• Creation and redemption policy and practice;
• The need for an active and transparent secondary marketplace;
• Communication and transparency
• at the point of investment and subsequently
• from manager to investor
• from investor to manager;
• Fee structures and their potential influence on behaviour;
• Alignment of interests and conflict management
• between investors and manager
• between manager and capital raisers
• between different investor types
• between departing, incoming and continuing investors;
• Liquidity
• the mismatch between dealing frequency and property transaction timescales
• the cost to investors of (often unused) liquidity;
• Debt management
• disclosure of stress testing.
Unlisted funds - Lessons from the crisis January 2012
A broad range of issues........
CONSULTING LLP
Improved governance
Greater transparency
Stronger controls environment
More independent supervision
14
Blurring of the boundaries between open-ended and closed-ended funds
A new style of fund
Unlisted funds - Lessons from the crisis January 2012
Semi-open ended funds
Investors were invested in open-ended funds not because they wanted short-term liquidity but because they did not want to be tied into the fixed duration
of closed-ended funds.
CONSULTING LLP 15
Open-ended becoming more closed-ended
A new style of fund
Closed-ended funds becoming more open-ended
New fund products
Example 2
Example 1
What does this mean in practice?
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Example 1 Open-ended becoming more closed-ended
Pre Post
Open-ended fund with monthly redemptions on a strict chronological
basis.
Subscriptions remain chronological monthly
Redemptions move to quarterly. Target to pay out within 6 months, one
quarter paid out ahead of the next. If 6 months cannot be met, move to
pro-rating redemptions over the whole queue. Up to 24 months to meet redemptions under oversight of an independent Supervisory Board.
Supervisory Board can extend beyond 24 months in exceptional
circumstances.
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Example 2 Closed-ended becoming more open-ended
Pre Post
Closed-ended fund with fixed life. Two years remaining
Semi open-ended fund with periodic liquidity events. 22 years of additional life. 2 year liquidity event 5 years.
CONSULTING LLP
Fund end of life
http://www.johnforbesconsulting.co.uk/property-eu-closed-ended-funds/
Article in Property EU in July exploring options for European closed-ended funds reaching the end of life.
The options:
a). Piecemeal or portfolio sale followed by winding up;
b). Fixed term extension;
c). Open-ended or semi open-ended fund;
d). IPO.
CONSULTING LLP
The fund end of life project
• Major project sponsored by AREF, INREV and the IPF;
• aims to provide advice on best practice relating to the end of life period for real estate funds;
• aims to identify simple overriding principles covering the end of fund life period to aid the real estate industry in enhancing its processes;
• will produce guidance and best practice on the key criteria identified, which INREV and AREF plan to incorporate into their guidelines and code of practices;
• headline results are due for release in the new year, with publication of the full report expected in May 2016.
CONSULTING LLP
The fund end of life project
The project team
Deborah Lloyd, Nabarro (Chair);
John Cartwright, AREF;
Maurits Cammeract, INREV;
Sue Forster, IPF;
Alistair Dryer, Aviva Investors;
Dan Batterton, LGIM;
Audrey Klein, Aerium;
Graeme Rutter, Schroders;
John Forbes, John Forbes Consulting;
Mads Rude, Sparinvest;
Mathieu Elshout, PGGM;
Stefan Ziegler, KGAL;
The project team has hired a part-time consultant to work on the research and draft the report, Rachel Portlock.
CONSULTING LLP
The fund end of life project
Interviews
Report
Protocol
http://www.ipf.org.uk/about-us/press-releases/guidelines-for-end-of-fund-life.html
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More listed vehicles
http://image.s6.exacttarget.com/lib/fe9212727165037e73/m/2/FS14961+The+Rise+of+REIT-r3-p.pdf
The attractions of permanent capital vehicles coupled with the changing tax environment will encourage the launch of new REITs.
The timing will depend on the impact of short term market volatility but the long term drivers are clearly there.
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changes
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How we invest in real estate to provide for retirement
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The impact of pensions changes
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The changing world of pensions
http://www.johnforbesconsulting.co.uk/the-changing-world-of-pensions/
Major changes to the UK pension market
• Auto-enrolment;
• Collective Defined Contribution
• Removal of requirement to purchase an annuity
• Possible changes to local government pension provision
Major changes elsewhere too
CONSULTING LLP
The size of the UK market
The report for the IPF, "Returning to the Core, rediscovering a case for real estate in defined contribution pension schemes" from which these statistics are taken, recognises that the value of £276 billion for occupational and workplace DC schemes may be unreliable. The 2012 ONS statistics gave a value of £386 billion at the end of 2010. Per the Pensions Institute, auto-enrolment is to increase DC AUM sixfold from c. £276bn in 2012 to £1,680bn in 2030.
http://www.ipf.org.uk/resourceLibrary/returning-to-the-core---rediscovering-a-role-for-real-estate-in-defined-contribution-pension-schemes-summary--october-2013--.html
0
275
550
825
1100
2012
Defined benefitOcc/workplace DCPersonal DC
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Defined contribution schemes
Employment related DC
80% plus of assets in default funds
Trust based scheme
Contract based scheme Personal DC
Managed by professional provider, typically a life insurer
Managed by trustees
Mostly in insurance based products
Permitted links rules (see next
slide)
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CONSULTING LLP
Insurance permitted links rules
An insurer must not contract to provide benefits under linked long-term contracts of insurance that are determined: (1) wholly or partly, or directly or indirectly, by reference to fluctuations in any index other than an approved index; (2) wholly or partly by reference to the value of, or the income from, or fluctuations in the value of, property other than any of the following: (a) approved securities; (b) listed securities; (c) permitted unlisted securities; (d) permitted land and property; (e) permitted loans; (f) permitted deposits; (g) permitted scheme interests; (h) 1 [deleted]1 (i) cash; (j) permitted units; (k) permitted stock lending; and (l) permitted derivatives contracts.
(a) in respect of a firm's business with institutional linked policyholders only, any of the following: (i) a qualified investor scheme or its EEA equivalent; (ii) any unregulated collective investment scheme that invests only in permitted links and publishes its prices regularly; (iii) any of the interests set out in (b)(i) to (b)(iv); (b) in respect of a firm's business with linked policyholders other than those described in (a), any of the following: (i) an authorised fund; (ii) a recognised scheme; (iii) a scheme falling within the UCITS Directive; (iv) a non-UCITS retail scheme; (v) a qualified investor scheme or its EEA equivalent or any unregulated collective investment scheme that invests only in permitted links and publishes its prices regularly, provided that no more than 20% of the gross assets of the linked fund are so invested.
Trustees of DC pension schemes are regarded as "non-institutional" investors for the permitted links rules.
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CONSULTING LLP
The shape of UK pensions post reform
Employer DC
..............................................
.............
...........................................................
..............................................
.............
.......................................................
....
Personal DC Collective DC NEST
LGPS CIV2
Liquid investments
Long-term investment in
liquid and illiquid assets
Annuities Who knows?
then....
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CONSULTING LLP
The shape of UK pensions post reform
Employer DC
..............................................
.............
...........................................................
..............................................
.............
.......................................................
....
Personal DC Collective DC NEST
LGPS CIV2
Liquid investments
Long-term investment in
liquid and illiquid assets
Annuities Who knows?
then....
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Pensions Act 2015
Conservative Party Conference 2015
CONSULTING LLP
Changes announced on Monday
Speaking at the Conservative Party conference in Manchester on Monday, George Osborne confirmed plans to pool the country’s 89 local authority pensions into six “British Wealth Funds” to boost investment in infrastructure
What?
How?
When?
Is this in the best interest of pensioners, present and future?
What does it mean for investment, particularly in real estate?
CONSULTING LLP
The shape of UK pensions post reform
Employer DC
..............................................
.............
...........................................................
..............................................
.............
.......................................................
....
Personal DC Collective DC NEST
LGPS
Liquid investments
Long-term investment in
liquid and illiquid assets
Annuities Who knows?
then....
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What might this look like?
CONSULTING LLP
What might this mean?
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Retail Personal and employer DC
DB collective DC etc
Fund offering high liquidity
Fund offering high liquidity
Balanced fundREIT shares
This is just an example!
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changes
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How we invest in real estate to provide for retirement
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The impact of tax changes
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Typical fund structure
36
SPVSPVSPVSPV
Holding company
Fund
Investors
The fund vehicle is generally tax exempt or tax transparent. It may be open or closed ended, regulated or unregulated.
A holding company is common to access double tax treaties and the EU parent subsidiary directive.
Properties are held in Special Purpose Vehicles to allow tax benefits from share sales.
This longstanding model may be under threat!
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Tax changes
Traditional European fund structure
Fund of funds investing in tax efficient local funds
Institutions investing directly
.
Tax advantages of cross border fund structures being eroded
SPVSPVSPVSPV
Holding company
Fund
InveInvestor
Fund
Fund Fund Fund
Investor
Fund SPV SPV
Investor
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Tax changes
Base erosion and profit shifting Double tax treaty changes EU anti-discrimination
developments
OECD action plan targets:
a) hybrids; b) Intra-group financing; c) Use of tax havens; d) Use to transfer-pricing; e) Tax avoidance generally.
Domestic law RE transfer tax and interest capping changes.
Double tax treaties amended to prevent use of property SPVs to avoid taxation of disposal gains.
"The Commission will investigate whether the tax rules concerning cross-border investment returns of pension and life insurance providers, including their income from real estate and capital gains, present discriminatory tax obstacles to cross-border investments; where necessary, it will initiate infringement procedures”
Tax advantages of cross border fund structures being eroded
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BEPS
OECD Base Erosion and Profit Shifting Action Plan
Prevention of tax avoidance
More details on my website: http://www.johnforbesconsulting.co.uk/beps/
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BEPS 6
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OECD Base Erosion and Profit Shifting Action Plan
Action Plan 6: Prevent Treaty Abuse
CONSULTING LLP
What has happened this week?
The final texts of the 15 Action Plans were published by the OECD on Monday.
They are expected to be adopted by the G20 at their meeting in Lima today.
The impact is going to be very significant.
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changes
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How we invest in real estate to provide for retirement
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Increasing complexity Lessons learnt from the crisis
The impact of pensions changes
The impact of tax changesSome conclusions
CONSULTING LLP
For more information
For more information about John Forbes Consulting, visit our website:
www.johnforbesconsulting.co.uk
For contact details:
http://www.johnforbesconsulting.co.uk/contact/
For recent publications:
http://www.johnforbesconsulting.co.uk/insight/
To join our mailing list:
http://www.johnforbesconsulting.co.uk/mailing-list/
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www.johnforbesconsulting.co.uk
This presentation has been prepared for general guidance and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining professional advice. No representation or warranty is given as to the accuracy or completeness of the information contained in this presentation. To the extent permitted by law, John Forbes Consulting LLP and its members do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it.
© 2015 John Forbes Consulting LLP.
