The UK has an unfortunate gap in its fund offering, compared with many other jurisdictions. It does not have, but in my view needs, a closed-ended or hybrid solution for pension funds and other institutional investors to hold UK real estate investments. Ideally, the fund should be unlisted, tax transparent and offer tradable units.
Melville Rodrigues, Head of Real Estate Advisory at Apex Group, shares his views with Practical Law Financial Services subscribers on topical developments or key issues relating to fund management.
In the March 2021 column, he considers HM Treasury’s call for input on its review of the UK funds regime and explains the opportunity for creating a new UK fund vehicle for real estate investors.
The gap in the UK fund market
Fund managers are currently limited to alternative fund choices, which have drawbacks:
Call for input on review of UK funds regime
HM Treasury, via its January 2021 call for input on the UK funds regime, is now offering a window of opportunity to rectify the gap, which could signiﬁcantly improve the real estate funds sector through the introduction of a professional investor fund (PIF).
The call for input is discussed in Legal update, HM Treasury call for input on review of UK funds regime. The overarching objective of the review is to identify options that will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efﬁcient investments better suited to investors’ needs. Speciﬁcally, HM Treasury asks for views by 20 April 2021 on issues that cut across the tax and regulatory elements of the UK funds regime and welcomes proposals on new fund structures.
The proposed Long-Term Asset Fund (LTAF) is discussed in the call for input. This is a proposal for anew authorised open-ended fund structure designed to enable investors, particularly deﬁned contribution pension schemes, to more conﬁdently invest in illiquid assets (such as venture capital and infrastructure) than they can using existing fund structures. The call for input also describes the Association of Real Estate Funds’(AREF) proposal for a PIF, which is the subject of this column given the gap in the market described above.
The PIF is supported by AREF, as well as the UK funds regime working group (UKFRWG), the Alternative Investment Management Association (AIMA), the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) and the Investment Property Forum. As a conduit for institutional productive capital, the PIF can facilitate the government’s goals forCOVID-19 reconstruction, infrastructure revolution and “levelling up” the nation (that is, by supporting jobs outside of London). Real estate, and its funds sector, have much to contribute, for example, by attracting capital and reinvigorating town centres, supporting social and affordable housing and developing social infrastructure. Other sectors could also utilise the PIF, given it is designed to be unconstrained in terms of eligible asset classes and investment strategies.
I understand that HM Treasury will prioritise their top three proposals, and then progress with legislative change for those proposals. Interestingly, the PIF proposal could be implemented via secondary legislation that amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001(SI 2001/544) (RAO) and by FCA consultation. There is no need for primary legislation.
Regulatory and tax considerations
The PIF is modelled on existing authorised contractual scheme (ACS) legislation, but is not open-ended. For regulatory purposes, it will be classiﬁed as a UK alternative investment fund (AIF) and beneﬁt from the ﬂexibilities of an unregulated collective investment scheme (CIS).
It is envisaged that the PIF will be formalised by deed, initially made between a PIF’s alternative investment fund manager (AIFM) and depositary. On admission, investors in a PIF will become parties to the PIF deed. The AIFM will make decisions on behalf of the PIF investors about the acquisition, management and disposal of assets, as well as risk management, subject to provisions within the PIF deed, and those decisions will be binding on PIF investors.
Other features include:
The PIF will adopt the co-ownership ACS framework, which is effectively tax transparent with tax liability applying to investors as follows:
PIF projects with a similar clawback mechanism as applies for co-ownership ACSs and PAIFs to limit the scope for tax avoidance.
There is a unique opportunity to address the current gap in the UK’s fund offering and improve the prospects for future generations of real estate fund managers.
Written by Melville Rodrigues, Head of Real Estate Advisory.
Published on Thomson Reuters Practical Law Financial Services
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