For the real estate crowd, the mantra of 2017 hasn't changed since last year: there's no alternative to investing in property!

Although asset prices continue to increase in most markets and as yields have consequently fallen to record lows, investment activity is still buoyant, especially in Europe. The race for attractive risk-adjusted long term returns in a market not too volatile (especially compared to stock markets that are reaching all-time highs in many places) continues to drive investors' appetites.

Not a boring job

Fund managers have a difficult task: finding assets at attractive net yields, in the most liquid markets, for investors who are increasingly "hands on". This means different challenges:

  • Fund managers may have to re-invent themselves in order to continue creating or adding value, which may require them to focus on specific asset classes less dependent on the macro-economic situation and economic cycle. I'm thinking about student housing, care homes, redevelopment/conversion projects (e.g. turning offices into residences), etc.
  • Asset values are high and cost of funding is cheap, but fund managers should not go too far in terms of leverage and loan-to-value ratios, despite the very low interest rate environment.
  • An attractive net return also means an attractive after-tax return, and in this area many challenges are upcoming due to international tax developments and especially the OECD "BEPS" action plan. Amongst the challenges are interest deduction limitations, transfer pricing, restrictions in tax treaty relief, adoption of the multi-lateral instrument for tax treaties, and others. This changing environment will mean more of a focus on substance and purpose, as fund managers develop more robust and credible set-ups in friendly jurisdictions under strong corporate governance.
  • Whilst accepting regulatory constraints imposed on them, fund managers could simultaneously attract new categories of investors by leveraging on the regulatory framework (for example by using structures adapted to solvency requirements for insurers), or by using new investment vehicles (for example the RAIF, which, with almost no time to market, is an enticing opportunity for funds in Luxembourg).

Other changes

Another trend I expect to emerge is the use of and reliance on local regulated REIT types of structures, as opposed to the classic Holdco-propco structure. Discussion for the adoption of a cross-border Lux-REIT continues, and I expect to see progress on this during 2017.

Substance is another changing area: we are seeing it evolve beyond the classic compliance type (accounting, tax, legal) and into a more industry-focused one (also employing asset managers and deal/finance individuals, etc.) This should help strengthen the business case of investment platforms such as Luxembourg.

Luxembourg continues to be at the forefront of cross-border real estate structuring due to its stable, predictable and flexible environment. Many sovereign funds, pension funds and large insurers use Luxembourg as their European real estate hub.

We continue to see a lot of appetite for strengthening or consolidating an existing Luxembourg presence and for moving to Luxembourg, which should continue in 2017. Centrally located and with excellent links to the UK, Germany, France and the Netherlands, to cite only EU jurisdictions, Luxembourg offers geographical as well as legal advantages. Brexit should most likely offer further opportunities.

The OECD recently amended comments on tax treaty entitlement for non-CIV funds (i.e. basically alternative investment funds) in order to recognise the rationale for institutional investors investing in property to use fund locations such as Luxembourg.

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