EUROPE - The European Public Real Estate Association (EPRA) has urged the EU to prevent property companies from getting caught up in derivatives regulations designed to combat speculators.

The European Commission's proposals for regulating over-the-counter (OTC) derivatives include forcing 'financial' businesses to post cash collateral into margin accounts to provide cover in the event of default.

Real estate companies use interest rate swaps to reduce uncertainty associated with fluctuating interest rates, and EPRA complains that the Commission has not been clear over whether it deems property companies 'non-financial', in which case they would be exempt from the rules.

The Commission's definition of  'financial counterparties' refers to alternative investment funds as defined in the AIFM Directive, but the scope of the directive, which is targeted at private equity and hedge fund managers, remains unclear with regard to its application to 'normal' operating corporate groups, including listed property companies.

EPRA, which is lobbying Brussels on behalf of Europe's listed real estate industry, has highlighted new research from Chatham Financial showing that failure to grant exemption would cause €65bn in collateral damage to the European real estate sector.

Germany, France, Italy and Spain alone would be hit with half of the losses as they collectively account for 50% of the European commercial property debt market, Chatham Financial said.

EPRA is using the findings to argue that unless the Commission clarifies that property businesses will be treated as non-financial, the impact would damage EU economic growth and job creation.

The lower amounts of capital availability would translate into lost opportunities in development and regeneration projects, translating directly into the loss of 99,000-122,100 jobs from the European economy, EPRA said.

Gareth Lewis, director of finance at EPRA, said the use of interest rate swaps was "critical" to property businesses because interest payments are often their single largest expense and funding is required over long time periods and different economic cycles.

"The consequences of being subject to rules designed for financial entities would be an immediate withdrawal of much needed capital from a sector that is critical to Europe's physical economy and a reduced ability to manage future financing risk," he said.

The European Parliament is set to start debating the Commission proposal next week with a likely adoption in the middle of 2011.

Once adopted, the regulations will be directly applicable in all member states without requiring transposition into national law and is expected to take effect toward the end of 2012.