AIF in Real Estate, UK region: International Collaboration & Bridging the Gap with European Securities and Market (ESMA)

A.??? SUMMARY: The key objective is to address the below-mentioned aspects of real estate-alternative investment fund, and as a reader, this article will provide opportunities to understand and familiarize with key aspects of real estate investment and the private equity market.

-?????? Key statistics around top investment destinations in the UK & and EU

-?????? Basics about Alternate investment fund (AIF)

-?????? Potential advantages of MOU between the Financial Conduct Authority (FCA) and the European Securities and Market Authority (ESMA)

-?????? Typical, structure of Alternative investment fund (AIF)

-?????? Responsibilities of stakeholders involved in AIF

1.?? INTRODUCTION TO THE REAL ESTATE INVESTMENT MARKET

The UK and the European Union are the top prominent clusters in the real estate global asset management market. Over the past few years despite market vulnerability and geo-political challenges, these markets have successfully attracted large investors from multiple large corporates such as government institutions, corporates, public sector undertakings, and private banks, insurance companies, global development financial institutions, multilateral organizations, family offices, and high net worth individuals. Generally, in the Real estate investment market, owing to the large capital requirement, high financial risk appetite, adequate liquidity, and willingness to willingness to remain invested for the total tenure of the Fund are among the few characteristics of private equity investors. As per the reports published by MSCI real estate, London attracted the highest overseas investment worth close to USD 12.6 billion in the last 1-year period ending between Q2 2022 to Q1 2023.

Dear Readers, would you like to guess the next 2 top cities that were hot spots for cross-border investments after London during this period? What if I told you that these are again European cities? Correct, these cities are Berlin, USD 7.8 Billion, and Paris, USD 7.5 Billion. [Source: CBRE UK research and MSCI real estate research and insight]

2.?? ALTERNATE INVESTMENT FUND (AIF) AND REGULATORY BODIES AND BASIC FRAMEWORK FOR ESTABLISHMENTS, COMPLIANCE AND OPERATIONS OF MANAGING INVESTMENTS

As defined by the UK Alternative Investment Fund Managers Directive (UK AIFMD), an "AIF is a collective investment undertaking which raises capital from several investors, with a view of investing it in accordance with a defined investment policy for the benefit of those investors." [Source: UK AIFMD]. Typically, the definition of an AIF as per The European Securities and Market Authority (ESMA), revolves under similar lines and conceptually the intent remains to collectively raise funds and manage large capital to maximize the financial benefits to the investors within various constraints surrounding Environmental Social & Governance policies and commitments. Generally, regulatory principles of investment are issued in connection with and relate to an investment in the Units of the Real Estate Fund (RE Fund) depending on the categories of product, and threshold target of fund. As per the governing norms of respective countries in Real estate alternative funds, RE Funds are generally registered with regulatory bodies such as The European Securities and Market Authority (ESMA), the EU's financial markets regulator and supervisor, and the Securities and Exchange Board In India (SEBI), and Financial Conduct Authority (FCA) in the United Kingdom.

3.?? LATEST DEVELOPMENT IN FINANCIAL SERVICES POST-BREXIT AND ROAD AHEAD POST MOU BETWEEN UK FCA & ESMA REGULATORS.

As per the latest development which was concluded recently has set a starting point for collaboration between the United Kingdom (UK) and the European Union (EU), an MOU was signed with the UK FCA and ESMA which will enable an exchange of information with respect to benchmark administrators who seeks recognition or are already registered and recognized in the EU. [Source: ESMA, 2023, and FCA,2023]. Key takeaways and independent perspectives that could prove game changers for mid to large institutional investors, pension funds and other investors, investment consulting, etc, in RE AIF, are indicated below:

?????????????? i.???????? Setting the tone and ground rules by regulator: Clear direction by UK regulators, FCA or equivalent, with regards to the considerations and regulations governing research and information sharing between EU & and UK will provide clear direction and minimise uncertainty surrounding ground rules and the extent of collaboration.

????????????? ii.???????? Data and information accessibility for buy-side firms and asset managers: Ease of access to the investment research from cross-territory will add an extra lever to the buy-side firms and asset managers in the UK

???????????? iii.???????? Levers for retail investors: Retail investors rely a lot on market insights and current and past trends and hence, accessibility to the information, data, latest deals, and lessons learnt across the EU will not be a challenge anymore.

???????????? iv.???????? Small to mid-size players: One of the biggest gains might be to the start-ups and small to mid-size Alternative Investment Fund Managers (AIFM), and the initiative will provide access to a “Research platform” that will prove significant in the new markets while conducting market analytics, investment appraisal and formulating product strategy, ESG related data analytics and access to commonly adopted practices by industry leaders, etc.

????????????? v.???????? Integration of academician and capital market: In the long term, this initiative will foster an environment of cross-border collaboration knowledge sharing and mutual learning between academician across the territories in EU & and non-EU and firms from capital market sectors.

???????????? vi.???????? Investment consulting and real estate advisers: Additionally, investment research and consulting companies would look forward to capitalizing on the resonance between FCA & and ESMA, and this might open a sea of opportunities for sponsored and bespoke research in capital markets and RE AIF.

?????????? vii.???????? Initial Public Offerings (IPO) & Real Estate Investment Trust (REIT): In the context of REITs and IPOs, there is a strong possibility of enhanced accessibility to research insights produced by market leaders and financial & private equity experts and hence resulting in probability of success of new launches and increased trustworthiness among qualified institutional investors (QIBs) and asset managers.

1.?? BASIC STRUCTURE OF AIF AND KEY RESPONSIBILITIES OF STAKEHOLDERS

The key responsibilities of different stakeholders involved in the process are summarized in brief:

?a. Investors: In the above structure, Investors are equity partners and their responsibilities revolve primarily around conducting deal sourcing and related due diligence of investments, formulating product categories and identification of markets for investment such as UK, EU, APAC, etc., reviewing business models submitted by investment advisers, timely disbursement of funds as per agreed drawdown mechanism, asset management and tracking of underwritten commitments at their portfolio level, fund exit strategy and related formalities, conducting valuations or reviewing valuation report submitted by investment advisers etc.

b.? Investment manager or advisers: Generally, Investment advisers are the bridge between investors and development or refurbishment partners, and their responsibilities revolve around raising and securing funds by delivering pitch presentations to the investors, supporting investors in the diligence of deal sourcing before entering into an investment agreement, formulating robust system, processes and mechanism for investment management which is aligned with regulatory requirements, preparing financial models to asset monitoring and reporting to investors without compromising on the ESG commitments. Additionally, investment advisers consist of a team of investment and asset managers, compliance officers, and technical and subject matter experts depending on the investment portfolio. The investment adviser intends to highlight any investment and asset management risks and prepare a sensitivity analysis report to highlight any deviations from underwritten commitments and maximize the return of investors before ensuring formulation and finalizing a successful exit strategy for investors.

c.?? Trustee: Irrespective of the sector, a trustee is responsible for supporting investment advisers in compliance with regulatory requirements such as FCA, ESMA, SEBI etc. Additionally, the team is responsible for supporting investment advisers/managers in managing regulatory compliances about raising funds, expenses and dividends to investors as per the waterfall diagram. Additionally, trustees may or may not be involved in day-to-day activities of investment to asset management however, trustees have a greater say when it comes to key decisions regarding compliance requirements of onboarding of investors etc.

d.?? Development or refurbishment party: The role of the development partner will depend on the scope of work and may vary from the design and development of the asset, marketing and leasing/selling, and property management. With an intent to increase the accountability of developers, it is a general practice that developers are one of the equity partners in the fund and their contribution may vary from 15-25% of the overall fund size. Generally, the key responsibilities of a development partner are to design and construct, market and lease/sell products, and property management.?

References:

1.???? Financial Conduct Authority, FCA, UK

2.???? European Securities and Market Authority (ESMA), European Union

3.???? CBRE UK, Research insight, Adapt to attract: London's ever-changing investment market

4.???? Securities and Exchange Board In India (SEBI), India.

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