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Property fund managers rue proposed EU regulation

Published 05/22/2009, 07:35 AM
Updated 05/22/2009, 07:40 AM

* Managers say one-size fits all regulation is unhelpful

* Fears regulation might deter new fund launches

By Sinead Cruise

LONDON, May 22 (Reuters) - Proposals to regulate alternative investment funds have roiled members of Europe's multi-billion euro property fund sector, who say new rules primarily designed to police errant hedge funds will shackle them unfairly.

Last month, the European Union executive unveiled draft law demanding greater disclosure and more supervision of so-called alternative funds -- including real estate and infrastructure -- as part of a plan to rehabilitate shellshocked financial markets and buoy investor confidence.

The EU argues such funds carry great risk to retail investors and require regulation. Property fund managers say their sector has done little to merit such incursion and the regulation may deter the launch of new investment products.

"Whilst property funds have been active users of leverage at relatively high loan to value ratios in recent years, hedge funds that use leverage often use very much higher levels of gearing," Nick Burnell, managing partner of real estate investor Rutley Capital Partners.

"The underlying assets are completely different in so far as hedge funds invest in liquid assets and, accordingly, have capital bases subject to redemptions at short notice," he said.

"Property funds by contrast invest in illiquid assets and, with the exception of open ended funds, do not offer liquidity."

The draft law, set to impact all managers with assets under management (AUM) of more than 100 million euros ($137.9 million), requires managers must maintain cash of 125,000 euros plus 0.02 percent of assets under management exceeding 250 million euros.

"Real estate funds that are part of larger investment management organisations will probably see the requirements as one more thing to factor into their capital management plans; independent funds, however, may feel the burden more," warned Richard Ross, a partner at financial services firm KPMG.

"Often these funds run 'lean and mean' with limited capital and infrastructure. They manage large portfolios of assets with small teams so changing capital requirements to be based on AUM rather than operating expenses will hit these funds disproportionately hard," Ross said.

Nick Preston, a senior director at real estate asset manager CBRE Investors, a unit of property broker CB Richard Ellis, said EU regulation of hedge funds and property funds in one effort was an unhelpful approach.

"The majority of property funds, which are much more conservatively geared and invest in assets with a much lower risk profile, offer very few characteristics similar to these 'alternative' asset classes," he said.

"The problem is not simply a lack of regulation, but still a shallow understanding among some investors and intermediaries that property cannot perform like an equity ... That's the reason why some funds have been suspended and that remains a very difficult message to communicate," Preston said.

He feared the measures could even dissuade some managers from launching new funds, stifling innovation in the sector and restricting investor choice.

"The capital requirement clause throws up a division between those who can afford to manage regulated funds and those who can't. It will preclude smaller investment houses from running those types of funds and could potentially discourage new funds from being launched," he said.

The EU has invited feedback on the draft law with a view to enshrining the proposals in about 18 months' time.

Those keen to thwart the proposals could follow the example of open-ended property fund managers in Germany, who clubbed together in February to compose guidelines to make their industry more retail investor-friendly in a pre-emptive strike against external regulation.

To protect retail investors in funds prone to erratic institutional inflows and outflows, the German Investment and Asset Management Association (BVI) have lobbied for stricter redemption notices and the right to stipulate a 90-day notice period for exits if five percent of a fund's assets are redeemed within 30 days. (Editing by Andrew Macdonald) ($1=.7254 Euro) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)

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