AIFM needs more clarification – BPF
The European Parliament finally passed a new financial directive yesterday, which is aimed at controlling risk-taking by hedge funds. However, it could also affect many property companies, despite the industry winning some key concessions, and some of the UK’s largest property firms are said to be demanding a complete exemption from the regulations.
The Alternative Investment Fund Managers (AIFM) Directive will be used to define who is caught by the EU’s new proposals to regulate derivatives under the European Market Infrastructure Regulation (EMIR). The trouble for the property industry is that the EMIR requires businesses deemed to be “financial” firms to put aside collateral for their derivatives transactions in cash. “Non-financial” businesses, which use derivatives to hedge the normal commercial risks of operating a business, are excluded from this requirement. However, property businesses, which use interest rate swaps to hedge against the risk of moves in interest rates, could be classed as “financial” under this regulation – it remains unclear – and would then have to post cash as collateral into margin accounts to provide for what is known as a “central counterparty” in the event of default.
The British Property Federation claims that if the whole property industry is brought under the scope of the AIFM directive, it could mean that all property companies – from the largest REITS to modest family firms – could “face massive administration costs, reduced investor returns, and could force smaller real estate companies out of business”. The federation says that the proposed EU rules on derivatives “could take an estimated EUR 64.9bn of working capital away from Europe’s real economy as property businesses risk being required to collateralise their interest rate hedges with cash.” It says this is the main conclusion of a Chatham Financial study commissioned by the European property sector.
Peter Cosmetatos, BPF finance director, said: “After months of frantic lobbying, we have secured an exemption for ‘holding companies’ which should confirm that most corporate groups are outside its scope. We also have a clarification that joint ventures are not intended to be caught by the directive.” He added: “But it could all still go horribly wrong. Adoption of the directive is not the end of the road. Many vital aspects of the new regulatory framework were so politically or technically challenging that the directive did not really deal with them. Among those is the status of corporate property groups and of joint ventures. The position remains uncertain because it is not clear how the directive’s definitions of ‘alternative investment funds’ or ‘holding companies’ are to be interpreted – the European Commission has previously suggested that typical REIT group businesses and the activities of typical property investment joint ventures should be in scope.”
It is hoped that further clarification will come from discussions among European regulators with the European Commission, before member states turn the directive into national law.
