Equity and debt capital formation across EU real estate investment markets could come under severe pressure in coming years, as Basel III, Solvency II and a host of other regulatory initiatives start to bite. Given global capital flows, and possible regulatory arbitrage by non-EU funds, prime assets could well be snapped up by US and Asian investors while their European counterparts struggle to access capital, a PropertyEU forum in Brussels heard this week.
'The regulatory train has left the station and there is little the European real estate industry can do to stop it now. Capital formation in the market will shrink and many investment managers will not survive, as they won't be able to raise money. We may even see a massive transfer of wealth to the US and Asia as investors there won't have the restrictions faced in Europe,' Ian Laming, Chief Operating Officer for pan-European real estate investment manager Tristan Capital Partners said.
Laming was speaking in a panel session at the European Real Estate Regulation and Investment forum held at the REALTY real estate trade fair in Brussels this week.
Laming said most of the safeguards incorporated in new regulation such as thorough reporting and portfolio stress testing should be part of a competent investment manger’s operational set-up anyway, but many firms don’t yet seem to have thought through the full implications of rapidly approaching changes such as the AIFMD (Alternative Investment Fund Managers Directive).
'Tristan isn’t anti-regulation because we’ve heavily invested in the systems we need, or outsourced our requirements, to ensure we comply with all the new rules coming over the horizon. We also expect many competitors who are not so well prepared to depart from the market as their costs rise and they struggle to raise capital, leaving the best mangers with more choice of assets in a Darwinian evolution. But we are concerned that this might mean less liquidity in the market five years down the road when we exit investments.'
Ad Buisman, partner and EMEIA Real Estate Leader for Ernst & Young, said there was a lot of talk among real estate investment managers that they are ready for the approaching regulatory wave, but in reality he was surprised at how ill-prepared many still are.
Jeff Rupp, Director of Public Affairs for INREV, said to be fair it was difficult for managers to prepare for regulation when key aspects of the new rules -- such as the handling of joint ventures in the AIFMD -- are still not clear, even though the directive is due to come into force in July, 2013.
He added that regulatory changes such as Solvency II are having a significant impact on the nature of real estate investment flows and the choice of vehicle investors select, for example with insurers and pension funds looking increasing towards debt, rather than traditional non-listed real estate funds. The cost burden of compliance with new regulation is also clearly falling disproportionately harder on smaller fund managers and becoming an effective barrier to entry into the industry.
Francoise Roels, Secretary General of Belgium’s largest listed real estate company Cofinimmo, said regulators had a long way to go to harmonise the impact of all the different rules applying to the industry both at the pan-European and national levels, before there could truly be considered to be a single market in property investment in the EU.
See more news from the European Real Estate Regulation and Investment forum in the June edition of PropertyEU Magazine. Click on the link below to subscribe