Real estate funds risk being 'caught' in European banking rules

Real estate funds risk being “inappropriately caught” by future European shadow banking regulations, industry bodies have warned.

Draft European Banking Authority (EBA) guidelines could limit how much Alternative Investment Funds (AIFs) – including real estate funds – lend, and lead to their being branded ‘shadow banks’.

The EBA has been consulting on guidelines respecting limits on exposures to shadow banking entities as part of efforts to insulate the mainstream banking sector from risk elsewhere in the financial system. 

Responding to the consultation, a number of European real estate associations, including CREFC, the European Association for Investors in Non-listed Real Estate Vehicles (INREV) and the British Property Federation (BPF), argue that the EBA is proposing to “shoehorn all AIFs, regardless of their characteristics, into its shadow banking definition”.

Germany’s Zentraler Immobilien Ausschuss (ZIA) has also backed the BPF, CREFC and INREV in its warning.

Peter Cosmetatos, chief executive at CREFC Europe, said it was “disappointing that Europe’s banking regulator seems determined to ignore the vital role that CRE debt funds are playing in helping credit flow to the real economy, dispersing risk in the financial system and helping the banks reduce their exposure to CRE debt”.

He added: “These funds are mostly closed-end and use little or no leverage, providing credit to property businesses under the regulatory framework of the AIFM Directive.

“Even based on the EBA’s own reasoning, most CRE debt funds do not present shadow banking risks, and they should not be branded as shadow banks.”

A cornerstone of shadow banking regulation should, he said, be that it “can only apply to entities that carry on bank-like activities”.

“Real estate funds investing in buildings do nothing of the sort,” he said.

Real estate equity funds have been identified by the Financial Stability Board, an influential body of regulators, as being “typically not part of the credit intermediation process”. 

Jeff Rupp, director of public affairs at INREV, said the current proposal was “simply too broad-brush”. 

“We hope the EBA will take a more tailored approach and only include unregulated entities engaged in credit intermediation activities in the definition of shadow banks,” he said.

BPF director of finance policy Ion Fletcher said the EBA’s “broad-brush” approach was “frustrating”.

“While we can see the logic behind imposing limits on exposures to shadow banking entities, the EBA’s view on what constitutes a shadow bank needs further work,” Fletcher said.

“Bricks and mortar real estate funds do not carry out bank-like activities and are not shadow banks.

“By saying that they are, the EBA’s new rules could limit lending to the built environment, which is sorely needed if we want to bring about regeneration in our towns and cities.”