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RealTime volume 5, issue 5

March 2011


Welcome to the 5th edition of our RE-PE News Digest

We are proud to announce that on 13 April 2011, Deloitte was voted “Professional Services Firm” of the year for the second time at the Real Deals Private Equity Awards. Deloitte was voted for this prestigious award by peers in the industry, which noted Deloitte’s growth record, integration of operational due diligence in support of transactions, dedicated debt advisory capabilities and the quality of its deal records. We trust that these qualities will translate into tangible results for your business.

Worth highlighting in this edition of RealTime is the crisp summary of the recent IFRS changes impacting the real estate and private equity industries as well as the latest available resources


Latest development on transfer pricing

On 8 April 2011 the Luxembourg tax authorities issued Circular No 164/2 Bis providing further clarification on Transfer pricing rules for intra-group financing transactions described in the Circular No 164/2 of 28 January 2011.

The original Circular on transfer pricing aimed at aligning the treatment of intra-group activities currently existing in Luxembourg with OECD principles, which introduced the concept of arm’s length principle.

Circular No 164/2 bis provided further clarifications on the application date and steps to be taken to comply with new regulations. These are summarised below:

  • As from 1 January 2012 an advanced pricing agreement (APA) obtained prior to 28 January 2011 will no longer be applicable.
  • Impact of Circular 164/2 Bis result in 2 possible scenarios:
    • Taxpayer will be assessed on the same basis as in previous APA, provided:
      • there has been no change in essential characteristics of financing transaction since original APA
      • Transfer Pricing analysis is performed and remuneration confirmed in the original APA is adequately validated
    • Apply for new APA
      • submit a new request for APA
    • demonstrate compliance with conditions described in the Initial Circular of 28 January 2011.


Legacy of the downturn

While financial crisis may be slowly slipping into the back of our minds, studies have hinted that we may only now begin to understand the true impact of the crises on the real estate industry.
In a study published in April 2011 by INREV (the European Association for investors in Non-Listed Real Estate Vehicles), it has been suggested that the risk of pricing shock still exists, based on an analysis of four drivers which influence the price of real estate, namely; Economic Prospects, Regulatory Change, Equity Capital and Debt Capital.

Further expected impacts of the financial crisis for the non-listed fund industry suggest a disproportionate adjustment in the capital base, adjustments to the organizational structure of the industry and, to both the scale and scope of fund products:

  • The capital base of non-listed real estate vehicles will decline absolutely and relative to the wider real estate markets because of (i) greater reallocation of non-domestic capital toward other regions; (ii) large investors changing their mode of investing preference; (iii) greater impact of declining use and availability of debt; (iv) expansion of the range of permissible investments for investors within the non-listed real estate investment allocation.
  • The combined impact of the underlying drivers of real estate, together with shifts in investor strategies suggest that the organizational structure of the non-listed real estate industry will undergo significant change. Investors are reviewing their real estate investment objectives, leading to a trend of dividing portfolios into a core base, with a small allocation to satellite funds. This suggests a separation of real estate allocations and real estate investing into market beta funds and private equity style alpha funds.
  • Regulatory change is both a driver and facilitator of such change. Given the lower fee profile of core funds, the economies of scale open to larger platforms will create significant competitive advantage, driving further consolidation of the industry.
  • The re-emphasis on beta and core funds requires strong diversification, which requires scale. This suggests larger funds in terms of strategic scope and by number of investors. However, this runs contrary to investors’ current preferences for smaller funds focused on discrete markets.

The change in the business for higher risk strategy funds delivering alpha suggests this segment will become smaller, locally focused and / or more specialized.

For more information, please view the full report on the website of INREV.

Capital raising

In its latest annual Capital Raising survey, INREV has confirmed expectations that 2010 would be a better year for raising capital than 2009. In fact, according to the study, €10.5 billion was raised on 2010, with €8.4 billion being called during the same period. This compares quite favorably with the €5.9 billion raised in 2009. Similarly, 2011 is also anticipated to be an improvement on 2010, with an expected €11.5 billion to be raised, and €9 billion being called.

An interesting topic also covered in this year’s survey, is the raising of capital for non-listed alternative products such as real estate debt funds. 20% of respondents raised capital for these products in 2010, with a cumulative amount of €4.7 billion.

The study further found that the main source of capital by type of investor remains to be from pension funds, with 61% being raised from this source in 2010. Fund of funds provided 8% of capital raised, making it the second largest source of capital. Noticeably, the contribution from life insurance funds decreased by 9%, the likely cause of this being the imminent introduction of Solvency II regulation and the concerns evidenced by the insurance industry. For more on Solvency II, please check the March edition of Real Time here.

In terms of country source of capital, Germany remains number one, while the UK was the most popular target location for investment of capital raised.

Note: In order to obtain more information about these and future INREV studies, you can register as a member of INREV on their website . INREV is the association for European Association for Investors in Non-listed Real Estate Vehicles. Their aim is to improve the accessibility of non-listed real estate funds by promoting greater transparency, accessibility, professionalism and standards of best practice. INREV is the leading platform for the sharing and dissemination of knowledge concerning the European non-listed real estate fund market. The association’s primary focus is on institutional investors, who guide INREV’s strategy and control the Management Board, although other market participants such as fund managers, investment banks, lawyers and other advisors provide additional support.

Read more concerning updates on issues impacting Europe, taxation updates and  the IFRS news in the PDF below.



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