New European financial rules that come into force in the New Year could help accelerate the use of secondary trading platforms by real estate investors.
The EU’s MiFID II, which takes effect on 3 January 2018, has implications for the buying and selling of interests in unlisted funds, including real estate.
The new regulations, which are designed to protect investors, should compel intermediaries to consider secondary-trading platforms or face the risk of not fulfilling ‘best execution’ practices, according to a specialist lawyer.
Intermediaries will need to demonstrate they have taken “all sufficient steps” under the rules, rather than “all reasonable steps”, which is the existing wording.
Melville Rodrigues, partner at CMS, said this change “raises the best execution bar”.
He said: “Intermediaries who act for investors in institutional unlisted real estate funds need to plan for the changes and should review their policies for executing secondary trade sales and purchases.
“Typically, seller representatives explore redemption and secondary trade exits within the fund structure, and have a dialogue with the fund manager.
“Buyer representatives may also look to have a dialogue with the manager to subscribe for new units. The fund manager may be able to accept redemptions, issue new units and/or facilitate secondary trades.”
But “all sufficient steps” means intermediaries must consider alternative sale or purchase options,” Rodrigues said. “If the fund units are tradeable on platforms, there may be the prospects of achieving a better result via this secondary market.”
Although less established than in its counterpart in traditional private equity, the secondary market for real estate funds has grown considerably in recent years. Property Match, a broker for European unlisted fund secondaries, estimates that approximately £2bn worth of units in UK and continental European funds traded last year.