Issues, trends & solutions within the industry
Proposed EU Directive for Alternative Investment Fund Managers (AIFM)
A proposed EU Directive for AIFM has been drafted (and re-drafted), against a backdrop of calls for increased transparency and monitoring of systemic risk in the financial services arena generally. The Directive is not expected to be implemented until 2011 and is currently subject to intense lobbying and negotiation. One outcome is likely to be increased costs of fund administration for real estate funds, as managers will be required to utilise independent valuation and custodian services.
The proposed Directive introduces an ‘EU passport’ allowing alternative investment funds to be marketed to professional investors in Member States by fund managers falling within the new regulations, although unfortunately there is no immediate provision for this to be extended to funds established in third countries and managed by EU AIFM. The regulations were drafted presumably with hedge fund and private equity fund models in mind, and press coverage has focussed on its application in those sectors. However, the Directive will apply equally to real estate fund managers and it will be critical to monitor its impact, particularly for new fund product development, and identify early any potentially unintended outcomes for real estate funds, their managers and advisers, and service providers.
Distressed real estate opportunities
In this challenging economic environment, recognising and capitalising on the next opportunity is crucial. The growth of distressed real estate situations may offer valuable investment opportunities in real property or real estate backed debt.
Our practical experience means we are well placed to give commercial insight into where and how value may be created. We have in-depth knowledge of the full spectrum of debt structures and have significant experience in (i) understanding the market/the borrower/the lender/the product, and (ii) realising the opportunity. In our view, it is critical to understand and manage the associated risks of the opportunity and it is important to implement a structure which delivers the desired commercial outcome and tax efficient returns.
The downturn will change the real estate fund manager landscape and we expect greater efficiency and transparency as a result. We assist our clients in optimising their management strategy and/or taking over other managers, to ensure they are in the best position to start spending capital when the market picks up.
More transactions in the European commercial property market – focus on UK assets
Falls in prime yields are now being reported across the main European real estate markets. In addition, currency re-pricing has recently increased the attractiveness of UK assets for overseas investors, and the UK has been the focus of several real estate recovery funds recently launched.
Deloitte teams in the UK and across Europe and more widely have continued to work closely together with many fund managers (as well as property companies, banks and investor groups) to support the development and launch of new funds, joint venture investments and even new or restructured investment platforms.
Fund recapitalisation & debt advisory
Refinancing is set to be a major issue for our clients, with one fifth of funds facing some kind of refinancing over the next 12 months. Our corporate finance, reorganisation services, tax and audit practices have extensive knowledge and expertise in the real estate backed debt arena. We can help fund managers take and maintain control in working with lenders through providing support in preparation of business plans or undertaking a company business review.
In addition, Deloitte has a global team of 60 professionals that provide expert independent debt advice, assisting you in relation to proposed covenant waivers and amendments to design an optimum strategy in the current debt market.
Our capital sourcing advisory team can assist in raising new equity and our corporate finance specialists can advise on the recapitalisation proposal and terms, modelling and structuring.
Management remuneration planning
Changes to tax regimes, notably in the UK and US, are focusing attention on tax efficient remuneration structures and incentivisation structures for fund managers and their teams
Deloitte is working with numerous fund managers to develop new strategies to maximise post tax returns from management fees & priority profit shares, and to structure tax efficient rewards to ensure long term retention of key members of the team.