Real Estate in Europe. Update on regulatory developments. Ad Buisman

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1 Real Estate in Europe Update on regulatory developments Ad Buisman

2 Update on regulatory development May 22, 2012 Page 2

3 Key regulations that will impact the real estate funds industry Regulations that directly impact real estate fund operations Alternative Investment Fund Managers (AIFM) Directive AIFM (Non EU-based platforms) Dodd-Frank act Regulations that impact the flow of capital to real estate funds Basel III Solvency II European Markets Infrastructure Regulation (EMIR) David Cameron voted against EU treaty to shield City of London from EU regulation. May 22, 2012 Page 3

4 AIFM Directive EU AIFM vs. non-eu AIFM: EU AIF Non-EU AIF EU Passport Scope Authorization requirements Capital requirements 1. Authorization 2. Marketing Remuneration guidelines Rules of conduct Conflict of interest 3. Conduct of business Leverage Major holdings and control 6. Specific provisions 5. Transparency Reporting to regulator Disclosure to investors 4. Functions and service provisions Valuation requirements Risk and liquidity management Depository Delegation and sub-delegation (EU/non-EU entities) May 22, 2012 Page 4

5 European Commission Approval Level 2 implementation measures drafted by European Union Significantly different from ESMA Guidance Regulation as opposed to Directive (i.e directly applicable vs. need to embed in local law) July 2012 final decisions May 22, 2012 Page 5

6 Changes from ESMA Advice (1) Changes to the ESMA advice Additions of new legal obligations Textual updates resulting in ambiguity Change or replacement of technical parameters proposed by ESMA advice Restrictions on the provision of certain services only to EU entities Deletions of proportionality or materiality provisions Content changes In nearly every area, but especially in PI Insurance, Leverage calculation, depositary, third country May 22, 2012 Page 6

7 Changes from ESMA Advice (2) Content changes: Definition of assets under management Own funds Leverage Professional indemnity insurance Organisational requirements Delegation Risk management Transparency Depositaries Third countries May 22, 2012 Page 7

8 Regulatory changes (AIFM Directive) Global trends and developments in the real estate sector Implementation deadline: 22 July 2013 May 22, 2012 Page8

9 Basel III Key aspects of Basel III: Higher quality and levels of capital in order to absorb potential future losses An internationally harmonized leverage ratio to constrain excessive risk-taking and to serve as a backstop to the risk-based capital measure Capital buffers to be built up in good times in order to be drawn down in periods of stress Minimum global liquidity standards to improve banks resilience to acute short-term stress and to improve longer-term funding Stronger standards for supervision, public disclosures and risk management May 22, 2012 Page 9

10 Basel III Implications of Basel III Enormous shift in bank business strategies and their attitudes to commercial real estate Unbundling real estate by biggest banks and return to core markets or sectors. Most real estate lending outside the home country considered as non-core. Sell of real estate assets wholly or partially owned by banks wherever there is a minimal impact on the balance sheet. Huge change of liquidity risk, stress testing and reporting for many banks. Strategic challenges for some banks due to increase of cost of capital May 22, 2012 Page 10

11 Solvency II Key aspects of Solvency II: Revision of EU-wide capital requirements and risk management standards with the aim of increasing protection and reducing the possibility of loss or market disruption in the insurance industry Applicable for all insurance and reinsurance firms with gross premium income exceeding 5 million or gross technical provisions in excess of 25 million Key elements include: adequate financial resources, an adequate system of governance, a supervisory review process, public disclosure and regulatory reporting requirements. Direct real estate investments will need a 25% capital deposit ratio with no leverage, or 39% (listed; 49% unlisted) if leverage is used. An internal model whereby insurers calculate their capital requirements using a tailored model may also be used. Look through method allowed; leverage awarded May 22, 2012 Page 11

12 Solvency II Implications of Solvency II Significant increase of capital reserves of insurance companies when investing in risky assets Impact on insurance companies allocation to the real estate sector the most likely result being more direct investments or becoming a lender to the industry. May 22, 2012 Page 12

13 Solvency II

14 Other regulations that will impact the real estate funds industry Other relevant regulations with impact for the real estate industry Fund Governance Dodd Frank EMIR Foreign Account Tax Compliance Act (FATCA) Global Investment Performance Standards (GIPS) Sustainability reporting / Integrated reporting Financial transaction tax May 22, 2012 Page 14

15 Sweeping Change to Accounting Standards Revenu Recognition Lease accounting Financial Instruments Consolidation/associates/joint ventures Fair Value Measurement and the implications on RE valuations (Level 2 or Level 3) However, timing is uncertain Will Europe adopt? May 22, 2012 Page 15

16 Implications for the markets Source: EY European Real Estate Assets Investments Indicator 2012 May 22, 2012 Page 16

17 Insurance companies Insurance companies are more and more active in providing loans to real estate companies Insurance companies are forecast to account for as much as 20% of the European lending market in the next three to five years (CBRE) They do this for a variety of reasons: Looking for stable cash flows; or Substituting tangible real estate for loans in anticipation of Solvency II; or Combinations of the above This may be in the format of: Buying existing loans, whether distressed or performing Issuing new loans Set up real estate loan funds and seek for external capital Participation in Loan Funds May 22, 2012 Page 17

18 Banks European Banks are heavily exposed to Commercial Real Estate Europe s real estate debt market amounts to 2.4trn, equivalent to 10% of loan books (Morgan Stanley) European banks hold about 750 bn. of delinquent real-estate loans, putting them under pressure to sell assets (European Business School) Most debt originated before markets plunged in 2007 is being held on bank balance sheets at 90 percent or more of face value. Potential buyers value them at 50 percent to 60 percent (Bloomberg) The End is not yet Near: European landlords have bn. of commercial property debt maturing by the end of 2013 at the same time regulators are urging banks to shrink their balance sheets (Bloomberg) May 22, 2012 Page 18

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