Germany’s new Fund Location Act (FoStoG), which is expected to enter into effect in early August 2021, will usher in more flexibility for open-ended public real estate funds.
The new act will be particularly relevant for structuring real estate investments whenever these are indirectly acquired via property holding companies.
Under the current so-called two-tier structure, an option that investment funds sometimes use, a given fund owns a property company which in turn holds an interest in another property company.
The actual property is owned by the latter. Such structures are usually chosen for tax reasons. Two-tier structures have been permitted up until now only for real estate located outside Germany. In future, they will also be allowed for real estate investments in Germany.
Michael Schneider, managing director at Intreal, said: 'The new regulations increase the flexibility for investment funds.
'The competition for good property stock is very intense at the moment, which makes it important for open-ended public real estate funds to be able to act swiftly and to have the right to acquire various structures.'
The rules governing shareholder loans will also be relaxed further. Shareholder loans are granted by a given investment fund to its property holding companies. They are usually employed to optimise taxes and cashflows.
So far, the borrowing cap here has been 50% of the fair market value of the properties held by the respective property company. This limit will cease to apply in future if the respective fund owns 100% of the property company’s shares.
Another implied change is that it will becomes easier to merge investment funds. To move forward with a merger, the AIF management company will no longer need to submit a formal exchange offer but may simply merge the funds.
Schneider added: 'The occasional merger of investment funds is nothing new. But AIFM companies have reason to welcome the new regulations because they reduce the red tape involved.
'From the investors’ point of view, however, the change means that they will have to look closely what a planned merger will effectively mean for them, and that they may wish to exercise their termination rights.'
