The subject of cross-border European indirect property investment is always treated cautiously by commentators. They see clear demand from institutions for vehicles that are more liquid, less management-intensive and achieve a greater spread of risk than direct property. But they also dwell on the problems inherent in indirect investment, bemoaning the lack of suitable REIT"-like vehicles and focusing on the immaturity of the market and extreme unlikelihood of European tax convergence in the near future.
These are certainly valid issues, but concentrating on the negative aspects can hinder rather than help institutions in their investment decisions. The time has come to look at the subject positively and to isolate those vehicles that provide a combination of tax transparency, liquidity and flexibility for the cross-border institutional investor.
British institutions have enjoyed the advantages of the property unit trust structure for indirect investment in UK property. However, apart from a small handful of authorised or offshore PUTs, these are not open to foreign institutions, and lately there has been a decrease in inflows into the unauthorised PUTs due to their inability to invest money quickly enough and to create new units.
A structure available to domestic and foreign investors alike is the limited partnership. This is tax transparent at the vehicle level and can be country- and sector-specific, as in the case of the MWB Leisure Fund, or can be internationally and sectorally diversified like the Transeuropean Funds run by PRICOA. The restrict-ed liquidity of limited partnership interests does not appear to deter investors, the demand for this vehicle being met by the emergence of new LPs such as the Industrial Property Investment Fund, run by Legal and General, and the two new UBK office funds, one to invest in the UK, and the other in France.
It was recently announced that La Salle Partners, the US investment manager, intends to set up a US REIT to invest in UK property. It aims to raise £260m ($435m) equity from investors worldwide which, when leveraged by borrowings, will create a fund of £400m. This development will undoubtedly increase the pressure on the UK government to pass legislation allowing a "REIT" vehicle.
The Netherlands, the European pioneer of the tax transparent fund, is way ahead still in terms of availability and suitability of stock for the institutional investor. The sector has a volume of some £9bn. Dutch investment institutions like Rodamco and Wereldhave are generally quoted on the Amsterdam stock exchange, providing desirable liquidity, but a few, such as Amvest and Winkelfonds Nederland (run by ING), remain unquoted. The Dutch sector also provides investors with a wide choice as far as country and sector are concerned. Rodamco and Wereldhave are internationally and sectorally diversified whereas, for instance, UniInvest concentrates on a mix of sectors within its home market. Vastned Retail is sector-specific but also has investments outside Holland, and Rodamco Retail and AZL Woningen are country- and sector-specific.
In Belgium, a similarly tax transparent vehicle, the SICAFI, must be listed on the Brussels stock exchange. Like the Dutch funds, these are corporate tax exempt providing they pay out at least 80% of their fiscal profit. However, the full potential of this vehicle has not yet been exploited, and at present only two have been established, together capitalised at around £550m. The Cofinimmo and Befimmo vehicles have concentrated on the Belgian market and have portfolios heavily weighted towards offices. The SICAFI is not obliged to remain sector- or country-specific, therefore there is a range of opportunities for new vehicles. Wereldhave, the Dutch fund, intends to convert its Belgian holdings into a SICAFI for fiscal reasons and it is rumoured that as many as five new SICAFIs may be created before the year is out.
Throughout this decade the press has proclaimed the success of the German open-ended Publikumfonds. Even now that inflows have decreased significantly due to poor performance over the past two years, it is still a £23bn sector with a predominantly private investor base. However, very little has been documented on the German Spezialfond, the open-ended fund designed for institutional investors. Although this has not yet been thoroughly researched, our investment team has established that the Spezialfond could also be a very tax-efficient vehicle for Swedish, French and Luxembourg investors.
In France, the only suitable vehicles, the SICAV and FCP, are required to invest at least 60% and 75% respectively in quoted property securities. In Spain there is a REIT-style vehicle, the FII, but it is obliged to invest a large proportion in the residential sector, a factor which may explain the lack of investor interest.
There is thus undeniably a long way to go before investors are spoilt for choice as regards tax-efficient, liquid indirect investment vehicles.
David Seddon is a partner in Jones Lang Wootton's European business team in London"