COMMENT In theory, the UK will leave the EU in a matter of days. In practice, there is still massive uncertainty about what that exit might look like. In reality, any prospect of an orderly withdrawal that prioritises the needs of investors, and indeed wider business security, is all but gone.
Assuming some form of Brexit does happen – and at the time of writing, even this remains less than clear – a disorderly Brexit has the potential to disrupt real estate investment flowing between the UK and Europe.
It is a vital consideration because the effect on pension and insurance funds in both the UK and Europe could be catastrophic. On average they allocate 10-12% of their total investment capital to real estate. A reduction of returns from these investments, caused by a disorderly Brexit, would adversely impact the payment of pensions and life assurances to ordinary citizens in the UK and Europe.
At a more general level, the commercial real estate industry directly contributed €385bn (£330bn) to the European economy in 2017, representing about 2.8% of the total economy, which is nearly equal the size of the European automotive manufacturing industry and telecoms sectors combined. The commercial real estate sector also employs four million people. The impact of disrupting investments on this scale would also, therefore, be felt in the wider economy, growth and jobs.
INREV has been working with our members and alongside other industry associations to urge policy makers on both sides of the Channel to ensure business continuity in the case of a so-called “no deal” Brexit. Indeed, as early as 2017 we issued a statement outlining the necessary steps to reduce the impact of a disorderly departure, and we have continued to make this case since.
There are three main asks that underpin this work: firstly, maintaining market access between the UK and the EU; secondly, avoiding new barriers to the flow of skills, capital and investment between the two; and thirdly, protecting the legitimate expectations and rights acquired through the existing legal framework.
It is also imperative to maintain the momentum on existing political initiatives as resources are drawn into the renegotiation, ensuring a transparent and open process which allows investors sufficient time to adapt, and securing the skills base that is necessary to ensure the growth and competitiveness of the sector.
Fortunately, the real estate industry has pressed ahead with its preparations, even in the absence of any real clarity on the politics surrounding Brexit. We have consistently advised our members to be realistic about the potential outcomes of Brexit, and we know that investors and fund managers alike have continued to work hard to ensure that any potential impact is kept to a minimum. As a result, we are optimistic that non-listed real estate funds will continue to operate after 29 March, regardless of the final outcome of the Brexit process.
For fund managers in the UK, this has often meant setting up parallel structures in one of the remaining 27 EU member state with AIFM authorisations and transferring some UK-domiciled funds to them. This allows the funds to be managed and marketed in the EU with an AIFMD passport post-Brexit.
In cases where UK managers already have existing EU-based AIFMs, this is possible simply by transferring UK-domiciled funds to their EU affiliates. UK-based managers that choose not to use EU AIFMs can market funds through private placement regime rules after Brexit, as can UK-domiciled placement agents.
For managers in continental Europe who are looking to continue operating in the UK post-Brexit, the process is fortunately much simpler. They can obtain authority from the UK FCA with relative ease, and they then have two years to ensure the funds become domiciled in the UK.
This hard work reflects the commitment across the industry to ensure that the hundreds of billions of euros that institutional investors from around the globe have invested into the European economy through real estate are not put at risk and, moreover, that the sector can continue to support the global economy.
Of course, many real estate asset managers and investors will still have unanswered questions and challenges beyond the end of March, and greater clarity earlier on would have been invaluable. However, for now we must hope that the decision makers will still allow for as much continuity of business as possible.
Jeff Rupp is director of public affairs at INREV, the European Association for investors in non-listed real estate vehicles
