Over €50 billion of capital is expected to be invested in global real estate during 2017, with North American investors on target to grow their global real estate allocation from 11.3% to 12.1%. These are the results from the fourth global Investment Intentions Survey 2017, published this month by INREV, ANREV and PREA. The survey, which specifically focuses on non-listed real estate funds, has a number of other interesting findings.
It is anticipated, for example, that 74.1% of these global investors will be investing in the UK and France as their top locations in Europe for 2017, overtaking Germany, which topped the results in 2016. It is further reported that 41.3% of these global investors have indicated non-listed real estate funds as their preferred investment vehicles.
The existing investment vehicles
US funds investing outside the US use a variety of off-shore non-listed investment vehicles, including structures in the Cayman Islands, British Virgin Islands and the Channel Islands. It is however the UK Limited Partnership (LP) that is one of the most popular non-listed investment vehicles used to invest in UK and European real estate. The benefits of these structures include limited liability protection for investors, tax-transparency and having effective measures in place to protect assets from creditors.
On the flip-side, limited partners will always need to be cautious to distinguish between the functions of ownership and control. Should a fund investor be held to have taken part in any of the management roles, they could find themselves in hot water and ultimately be liable for partnership debts. Whilst many investors take a cautious approach when it comes to management activities, some do cross the line, for example by insisting on having more effective approval rights, ultimately compromising their limited liability status under the LP structure.
The ‘New’ Private Fund Limited Partnership
To maintain the UK’s competitive position in private investment funds, new legislation has been introduced in the UK’s Parliament last month (January 2017). When approved, it will introduce a new UK investment vehicle from April 2017 – the ‘Private Fund Limited Partnership’ (PFLP). The new structure will be a significant benefit to US and other international investors who are currently using the existing LP structure for their UK investments. It will retain the benefit of limited liability status and the transparency for investors, but eliminate most of the financial and administrative burdens associated with the existing structure.
So what changes will the new PFLP bring?
- Capital Contributions – There will no longer be a requirement for limited partners to make capital contributions under the new PFLP. Partners will simply have an option to make any contribution, with extended rights to withdraw the capital contributions. The existing requirement to publicize any capital contributions will also fall away.
- The “white list” – The new legislation will introduce a non-exhaustive list of “permitted activities”, which limited partners may now undertake in the partnership without any doubt about whether they will be classed as management activities. These include: monitoring performance; and being advised and having their consent sought by the general partner on certain decisions, but never acting on behalf of the partnership itself. The “white list” rights will not be automatically incorporated, though, and the relevant Fund will need to select and adopt the specific activities they want to incorporate into the partnership agreement.
- Re-designation from Existing Partnership Structures – Existing LPs under the current structure will be able to apply for re-designation as PFLPs, subject to meeting qualifying fund conditions. Once re-designation has occurred, the partnership will not be able to return to the ordinary LP status however.
- Duty not to compete with the Partnership – The duty not to compete will largely fall away under the new PFLP. This is to deal with the issue of larger investors that might be invested in other funds with similar policies, objectives or investments.
With the benefit of foreign exchange volatility following the UK’s Brexit decision, it is anticipated that opportunities to invest in Europe will be particularly attractive to US investors who,depending on where they plan to invest, should consider taking advantage of the new PFLP, as part of the variety of investment vehicles available in 2017.