posted 5 Apr 2007 in Volume 9 Issue 10

Country report: Improved regime for regulated property funds in Ireland

By Fionán Breáthnach, head of investment funds, Mason Hayes+Curran

In the past decade, Ireland has emerged as a centre of excellence for the alternative investment market. This position is largely driven by the country’s flexible regulatory environment, the depth of expertise among Irish service providers, a favourable tax regime and a wide product choice. It is now estimated that approximately 37 per cent of total global alternative investments are serviced in Ireland.

As alternative investment products become more mainstream, with institutions and pension funds diversifying their investment strategies, the demand for more regulated alternative investment products has increased. We have witnessed, in particular, an increased interest in regulated property funds, and recent initiatives by the Irish Financial Regulator to allow greater flexibility in the structuring of Irish-domiciled property funds has provided new opportunities for property investment.

Funds in Ireland can be categorised as either retail funds, professional investor funds (PIFs) or qualifying investor funds (QIFs). A retail fund allows subscriptions at any level, a PIF has a minimum subscription of €125,000, and a QIF has a minimum subscription of €250,000 and a minimum net-worth requirement for the investor. The Financial Regulator allows greater flexibility in the structuring of QIFs, and in February 2007 it introduced a procedure whereby a QIF can be authorised by the Financial Regulator within a day of submission of documentation.

While many investors still choose to invest in unregulated property funds, there has been an increased interest in regulated property funds. Following on from this, recent discussions between the industry in Ireland and the Financial Regulator have resulted in revised policies for the regulation of property funds in Ireland.

The main issues addressed are summarised below. It is also worth noting that the Financial Regulator intends to further improve the regulations relating to property funds and to issue a new Guidance Note to supplement the current regulations. Matters still under discussion include the level of leverage to be employed by retail and professional investor funds; the assessment of investment restrictions on a gross-asset basis; and permitted investment in development land.

The Financial Regulator’s new policies on some of the matters decided upon are as follows:

Previously, the Financial Regulator only permitted one layer of subsidiaries below the level of the fund. The industry perceived this as an obstacle to the advantageous structuring of property investment through the use of special purpose subsidiary companies. Having consulted with the industry, the Financial Regulator has confirmed that future PIFs and QIFs may establish multiple layers of special purpose vehicles (SPVs) subject to the following conditions:

Each SPV must be wholly owned by the scheme or its wholly-owned subsidiary(ies);
The shares in each SPV must be registered in the name of the trustee;
The underlying assets must be registered in the name of the trustee or in the name of the scheme or its SPV. The trustee must be appointed as trustee to each SPV and must be in a position to demonstrate to the Financial Regulator it has sufficient controls in place in relation to each layer of the SPV structure;
The prospectus must clearly disclose the intention to establish SPVs and the periodic reports must include information (i.e. name and where established) on those in existence on the reporting date;
The majority of directors appointed to the board of the SPV will be directors of the scheme. A new Guidance Note will set out conditions under which the Financial Regulator will grant a derogation to PIF and QIF schemes from this requirement. As a minimum, at least one director of the scheme must be on the board of the SPV;
The assets of each SPV must be valued by the scheme or its delegate.

The above measures will allow greater flexibility in structuring international property investments and will mean that a property fund can implement a more successful structure through the use of subsidiary companies.

The assets of property funds can be registered in the name of the Fund itself or in the name of its wholly-owned SPV, subject to the following conditions, which will be set out in the new Guidance Note:

Restriction is placed on the registered title of the property to the effect that the title cannot be disposed of without the prior consent of the trustee;
Where this is not possible, a caution is registered on the title to put prospective purchasers on notice that the prior consent of the trustee is required for sale of the property;
Where neither of the above is possible, the scheme will undertake, through a provision in the custodian contract, that it will not invest in property assets unless the trustee is satisfied that the property cannot be disposed of without its prior consent or that arrangements equivalent to those set out above are in place.

Whereas previously the Financial Regulator required promoters and investment managers of property funds to be regulated entities, applications from non-regulated promoters and investment managers will now be considered where appropriate expertise can be demonstrated and subject to a review of the firm’s fitness and probity.
Previously the appointment of independent valuers was required to be included in the prospectus and the Financial Regulator was required to be informed of the appointment or resignation of each independent valuer. These requirements have now been disapplied, allowing greater flexibility in the appointment of such valuers. The regulations will also be amended to allow properties to be valued at “market value” instead of “open market value” as currently stated. Properties must be valued twice yearly (a physical yearly valuation and an interim ‘desktop’ valuation will suffice).
The definition of ‘property’ will be amended to delete the previous requirement for eligible leasehold property assets to have a minimum unexpired lease of 70 years;
The definition of ‘property related assets’ will be amended to confirm that it includes securities, other collective investment undertakings and property derivatives.

These developments are part of an ongoing industry initiative to improve the regulatory framework for the establishment of property and private equity funds in Ireland, and it is expected that this improved flexibility will result in greater opportunities for structuring regulated property funds in the country.