A government review of the UK funds regime, launched in conjunction with yesterday’s Budget announcement, has been welcomed by real estate investment managers.
The review, which is designed to “ensure the ongoing competitiveness and sustainability” of the UK funds sector, could eventually encourage the creation of more onshore real estate investment vehicles being launched in the UK.
It will cover the tax treatment of special-purpose vehicles, or asset-holding companies (AHCs), in alternative fund structures. Closed-ended real estate funds, which are typically structured as limited partnerships, hold underlying assets in AHCs – but their tax treatment in the UK has led fund managers to base them offshore.
Matt Probert, head of tax at Savills Investment Management, said the UK “remains uncompetitive as a holding jurisdiction for international real estate funds, which has resulted in a shift of holding and fund management activities to other jurisdictions”.
He said the consultation was “both welcome and long overdue” and hoped that this was “the first step to a more level playing field”.
Last week, the government was urged by the Investement Association (IA) and the Association of Real Estate Funds (AREF) to establish a new onshore, closed-ended professional investor fund (PIF) for institutional investors that could be used to invest in real estate and other asset classes, including illiquid assets and private markets like infrastructure.
Stephen Palmer, director of indirect investments at DTZ Investors, welcomed the review. “The broad aim of ensuring the ongoing competitiveness of the UK echoes the concerns expressed in the AREF proposals issued last week for the PIF.
“The consultation published alongside the Budget covering asset holding companies explicitly aims to explore measures that will ‘make the UK a more attractive location for companies used by funds to hold assets’, and as such the review will begin to explore the need to establish other alternative onshore fund structures.
“A consultation on the PIF later this year would be a natural follow-on step.”
Paul Richards, managing director of AREF, said: “We are delighted the government has listened and responded to the submission on which we worked closely with the IA and we look forward to contributing to the government’s review of the UK’s funds regime.”
Melville Rodrigues, a partner at law firm Charles Russell Speechlys who has been advocating the creation of the PIF since last year, said he was “delighted” that the government had announced it would undertake the review this year.
”UK fund management houses will be able to utilise the PIF as an onshore fund to pursue real estate, infrastructure and other investment strategies related to the UK and elsewhere,” he said.
“In addition, the PIF is designed to be attractive to domestic as well as to international pension fund and other institutional investors.
“Fund management houses looking for a closed-ended or hybrid fund to hold UK real estate investments, which has the attributes of being unlisted, tax-transparent and offering tradeable units, are currently forced offshore.”
He added: ”The PIF will address the onshore fund gap and reduce barriers for new funds, enhancing the UK’s brand for fund and asset management.”
John Forbes, an independent consultant who specialises in real estate funds, said the consultation on AHCs was “an opportunity for the industry to comment on what they would like to see in the regime as the consultation is a very open one”.
He also said the government’s “assumptions about the types of fund for which this is relevant is far too narrow”.
Forbes added: “In terms of competing with Luxembourg, which is the obvious jurisdiction of choice, the attractiveness of the UK will be diminished by loss of access to the EU Parent/Subsidiary Directive next year and there is not a lot that the consultation can do about that at this stage.”
