REflexions - Issue 1
Real Estate - April 2015
“No man ever wetted clay and then left it, as if there would be bricks by chance and fortune” – Plutarch
Nor is there success in real estate by chance and fortune, but by professionalism and diligence.
Deloitte’s network of member firms have long recognized this and believes that real estate cannot be lumped together with other asset classes, but deserves - and even demands - a voice of its own. Deloitte is therefore particularly pleased to bring you this first edition of REflexions, a magazine about real estate investment management, written by real estate professionals for the real estate sector and concentrating on that one unique theme.
Welcome to this, Deloitte’s first dedicated real estate investment management publication, which will be published twice a year with a mix of features on market trends and technical issues – such as tax and regulation – as well as interviews with leading figures in the real estate funds world.
Read the descriptions below to learn more about what's covered in this issue.
The UK real estate market in the spotlight
Headlines point to phenomenal performance with total UK returns reaching their highest level for many years, but behind this are some fascinating developments. Waves of new investors, an occupier market changing at a rapid pace – driven by technological disruption and economic shocks, both positive and negative – the twists and turns of new regulation, and evidence of increasing M&A activity in the sector are all part of what made 2014 a particularly exciting year.
Given this backdrop, it is perhaps unsurprising that the consensus envisages a moderation in performance in 2015, but Deloitte's view is that this cycle has further to run and the UK economy will show reasonable growth, even if the pace will be more measured than last year. This will provide a solid foundation for another year of robust performance, with further yield compression and improving rental growth.
The real estate investment management industry
Deloitte Partner Paul Meulenberg met with Pieter Hendrikse, CEO & Chairman of CBRE Global Investors, EMEA region to discuss ING Real Estate Investment Management joining CBRE Global Investors in 2011. Read the discussion on how the integration has gone, how clients and investors have responded to the merger, and the challenges they anticipate facing in the coming years. During the course of their conversation, Paul and Pieter also looked at how the real estate investment market could develop over the next 5-15 years and discussed the increasing competition among international real estate investment managers.
Risk management in real estate
Since the 1970s, TV series have been ‘planting’ hidden commercial messages in their scripts to capture the customer. Back then, regulation was light so statements like ‘do you want a Coke or a Pepsi?’ could easily slip into a script. Nowadays, the average consumer is smarter and may be too sophisticated to be interested in such a plain message process. Media businesses have found other ways to be successful in communicating such ‘read between the lines’ messages.
One way would be by introducing amazing new technology which is later made commercially available by one of their sponsors, using a sequence of images or words which directs the mind into thinking ‘oh, I want some chocolate now’, or ‘I always wanted to go to
Of course the question is: ‘how all this is related to risk management in real estate?‘ Undoubtedly, the real estate industry has been one of the key drivers in the globalization of capital over the past fifty years. The recent global recession, prompted by over-leveraging in many sectors including real estate, has resulted in increased focus on risk and stress across the real estate industry, and risk is now at the top of the agenda for owners, developers, managers, investors and, of course, regulators.
Wind of change
Following the global transformation of the retail fund industry in recent decades, new operating models spanning from the front-middle to back-office operations of RE asset and investment managers to service providers have emerged. These are not just necessary for adapting to current legal and industry guidelines but are key requirements for business viability, service marketability, and expansion.
Major regulations that have pushed essential changes in the asset management industry include the Dodd-Frank Act and FATCA in the U.S., and the AIFMD and forthcoming PRIPS and BEPS OECD recommendations in Europe. Many of the RE structuring vehicles and investment strategies require compliance under this new wave of laws, directives, and their implementation requirements. Investor and industry standard-setting bodies such as INREV are likewise influential in clamoring for industry reforms and standardization of the highly fragmented, inadequately automated, and vastly diversified RE business.
Moreover, the needs of investment managers are constantly changing, with some requiring more streamlined middle to back office, bridge financing, and a single point of contact for a cross-border and multi-jurisdictional service offering.
The new way to sell alternative investment funds
AIFMD provides the framework within the European market for the cross-border distribution of Alternative Investment Funds (AIFs). The key challenge is to understand the practicalities of how to comply with the Directive while continuing to raise capital.
In a nutshell, AIFMD regulates the access of Alternative Investment Fund Managers (AIFMs) to EU-domiciled investors. Contrary to the UCITS Directive, AIFMD does not regulate the product itself, i.e. the AIF, but the managers, the AIFM. Key objectives of AIFMD are to extend appropriate regulation and oversight to all alternative actors; to improve financial stability by monitoring systemic risk, to create a European market for alternative investments via passports for management and marketing activities and, perhaps most importantly, to increase transparency for the protection of the end investors.
The real estate investment industry in the face of BEPS
Innovation, new technologies such as the internet, and economic globalization have changed the way corporates and investment funds operate and invest. International exchanges, investments, and trades have grown significantly, creating new challenges for national tax authorities worldwide. Many consider that current international tax rules and approaches are no longer in tune with the realities of doing business in a globalized world and hence do not guarantee a non-discriminatory tax system.
In this context, on 19 July 2013, the OECD issued an action plan on ‘Base Erosion and Profit Shifting’ (‘BEPS’ and the ‘Action Plan’) describing 15 distinct initiatives or action points. The primary objective of this plan is to provide guidelines and actions to secure increased synergies between global economic integration, international cooperation, and national taxation rights. Timing objectives center on finalizing recommendations by the end of 2015.