Figures published recently by Preqin looking at the state of the alternative investment industry painted a nuanced picture of the global real estate sector.
According to data, private real estate showed strong growth in 2019, despite a weakening global economy. The total amount of funds raised last year stood at US$151bn, an all-time high, whilst total assets under management rose to a record US$992bn.
But there is another side to the picture too. There is still real concern over valuations eating into returns, with the number of vehicles reaching a final close in 2019 at its lowest level in a decade, whilst capital is consolidating significantly across the industry. It’s a story of fewer, but bigger funds.
With 93% of investors indicating that they will commit as much or more capital to real estate beyond 2020, though, the signs remain positive, and this should give IFCs that support the real estate investment community much food for thought.
Indeed, many of these same sentiments were echoed at the first in our Funds Masterclass series, held in London in early February, where we assembled a panel of industry experts looking at key trends in the real estate sector specifically.
Speakers pointed, for example, to a sector becoming increasingly dominated by the ‘big boys’, where greater competition is leading managers to look at increasingly innovative, emerging and niche opportunities. The shifting fortunes of the high street retailers are also prompting a move into new areas of opportunity such as shared living – areas which require a different, service-based business model.
ESG was another key theme to discussions. Speakers discussed how ESG is one of the key considerations in real estate investment decisions for investors and managers alike, and one that will mature as it embeds itself in the sector over the coming year.
Managers are keen to meet investor demand for ESG compliance. But in order to do so they need specialist support, a platform that can guarantee a sound ESG framework and an ability to apply ESG thinking to the real estate sector, from sustainable development and student accommodation to regeneration projects and social housing.
Beyond ESG, and managers are looking at diverse niche areas too. Aggregate capital raised by opportunistic funds, for example, surged by 38% to almost US$70bn in 2019, according to Preqin, with ‘proptech’ emerging as an area offering particular opportunity as real estate companies looking increasingly at tech to boost their productivity and efficiency.
But this foray into new exciting areas needs to be backed up by a platform that is stable, reliable and familiar. As speakers at our Masterclass emphasised, investors and managers are sensitive to reputation and as such will want to work with partners and IFCs that can demonstrate a good reputation too.
Stability is particularly important – Brexit and geopolitical upheaval more widely are key concerns, whilst regulatory complexity, with the introduction of key transparency initiatives like BEPS, substance, transparency and greater reporting requirements, are all a massive headache for managers.
IFCs need to be alive to and able to respond to these issues, to help managers and investors minimise risk as they look for opportunities in diverse areas.
Being tuned into these trends is what has enabled Jersey to fare so well as a centre for cross-border real estate structuring to date. At the end of September 2019, total net assets for Jersey’s fund industry, including real estate, stood at US$442 billion; a growth of fifty percent over the past ten years. Outside of the funds sector, research by Capital Economics on Jersey’s Value to Britain shows that Jersey is home to more than £600 billion in corporate asset vehicles. Around four fifths of that is thought to be invested in real estate, with a strong emphasis on UK commercial real estate.
In particular, speakers pointed to two areas where Jersey was particularly well placed.
First, BEPS and substance – Jersey is well ahead of the curve, having been one of the first jurisdictions globally to implement BEPS into domestic law, and having had an assumption towards substance already. It has decades of real estate experience, from conveyancing to administration to legal expertise, with an almost 14,000 strong financial services workforce.
And second, with the UK introducing changes to its Capital Gains Tax (CGT) for overseas investors in commercial property disposals, Jersey’s ability to offer a selection of well-established structures is resonating well with managers. The JPUT continues to be the default structure, for instance, whilst the REIT is very much at home in Jersey. They are not new structures, but they work well, including in relation to the transparency and reporting elections under the UK’s new CGT rules.
HMRC provided valuable pointers on how to navigate CGT reporting elections. Having worked with HMRC over the last two years to help mitigate some of these complexities within the proposed tax changes, this collaboration has given investors confidence in Jersey – setting us apart as the jurisdiction of choice for UK real estate investment structures.
With an anticipated inflow of pent up capital anticipated into the UK post-Brexit, Jersey has all the tools in its toolkit to continue to play a vital role in enabling overseas investors to access the UK market and meet the requirements of the UK’s new rules, whilst simultaneously facilitating much-needed investment into UK property and infrastructure.
Overall, the message was that IFCs need to show a sensitive appreciation of the complex world managers are operating in and seek to soften that complexity by providing a simple, no-nonsense solution based on quality and expertise. In many ways, speakers suggested, Jersey’s tax neutrality, political stability and solid judiciary makes investors and managers feel comfortable. And those qualities are particularly valuable when they are operating in an environment that is more testing than ever.
Overall, the feeling is that 2020 could well be something of a watershed year for real estate. Certainly, figures indicate that there is strong appetite to allocate to the asset class, but the sector is evolving and IFCs that support the sector need to evolve with it. It’s a sector of ever greater complexity and innovation, but that needs to be balanced by simplicity.
Our next Funds Masterclass in London will take place on Wednesday 25 March at the Sofitel St James, and will focus on private equity. The event brings experts in their field together to discuss the major initiatives impacting private equity from trends in fund structuring, co-investment, AIFMD and substance through to tax and regulatory developments.