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European Commission recommends EU retail framework for real estate funds


The European Commission has published an industry report proposing the establishment of an EU framework for retail funds that invest in commercial real estate and other types of property,

The European Commission has published an industry report proposing the establishment of an EU framework for retail funds that invest in commercial real estate and other types of property, which are not currently governed by the Ucits regime for funds that can be sold freely throughout the European Union.

The commission says the report on the EU market for open-ended real estate funds, and stakeholders’ reactions to it are intended to contribute to the policy debate on whether regulatory barriers should be removed to facilitate development of a cross-border EU market for open-ended real estate funds.

In particular, it says, the report constitutes an important input to the forthcoming communication on so-called non-harmonised investment funds (those that lie outside the criteria set out in the EU directives on Undertakings for Collective Investment in Transferable Securities), scheduled for publication in autumn this year.

The report, which will be publicly debated at an open hearing in Brussels on April 8, was prepared by the commission’s expert group on open-ended real estate funds. ‘I would like to thank the members of this group for working with the commission over the past six months,’ says internal market and services commissioner Charlie McCreevy.

‘Their final report sheds new light on the European market for real estate funds. Assets managed by regulated real estate funds have more than doubled over the past 10 years. Open-ended real estate funds are now subject to retail investment fund regulations in 12 member states.

‘This report highlights the fact that divergent national rules create regulatory fragmentation in the EU, holding back further development of this business on a cross-border basis and possibly limiting the range of investment choices available to consumers.

‘We will study carefully the business case for action presented by the group and their recommendations on the need for new EU legislation to overcome market access barriers. However, before the commission takes its own view on the issue, I invite reactions from other interested stakeholders and market participants.’

The report calls for the introduction of EU legislative arrangements to provide cross-border retail distribution of open-ended real estate funds that invest primarily in high-quality real estate assets, including land and buildings, and are currently excluded from the Ucits directive.

The authors say open-ended real estate funds are already a well-established nationally-regulated investment product in many member states, and several more have recently introduced new regimes to allow real estate funds to be offered to retail investors.

The report compares these national regimes with the rules applicable to Ucits funds and concludes that the high level of similarity between national rules represents a strong basis on which to harmonise rules around a common set of EU regulatory provisions.

The expert group expresses frustration that it is practically impossible to offer nationally-regulated open-ended real estate funds to foreign retail investors on a cross-border basis, and recommends EU legislation to overcome internal market access barriers. It proposes a set of features that could be used as a regulatory template for investment products incorporating high levels of investor protection.

The UK’s Investment Management Association has welcomes the report’s proposal of a European passport for retail open-ended real estate funds, but is cautious about the idea of incorporating it into the established Ucits framework, which the IMA describes as the ‘global gold standard for liquid and well-diversified investment funds’.

Jarkko Syyrila, head of international affairs at the association, says: ‘Many member states, including the UK, have domestic retail real estate funds that over the years have been proved to add value and diversification to retail investors’ portfolios. It is therefore worthwhile extending single market provisions on investment funds to real estate funds.

‘The illiquid nature of these funds, however, means that they significantly differ from existing Ucits funds. It is therefore essential to assess the proposals further in order to find the best way of achieving a European passport for real estate funds.’

The IMA says it also strongly supports the commission’s ongoing work to create a pan-European private placement regime as another important step toward creating a cross-border institutional market for real estate funds.

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