Final Thesis
The Real Estate Market in Luxembourg:
Good or Bad news?
Supervisor
Prof. Michael Donadelli
GraduandLeonardo Sanguin
Mt. 837073
I am really thankful to Michael Donadelli, he is been my supporter and supervisor. Thanks to him and all the time he wasted to teach me that most important thing is to be concise and clear. All remaining errors are my own. Thank you Michael!
1 introduction to real estate investment funds 1
1.1 A brief global overview . . . 1
1.1.1 The Emerging Market’s power . . . 4
1.2 The European Market . . . 5
1.3 Data providers, Agents and Associations . . . 7
1.4 The Special Purpose Vehicle . . . 9
1.4.1 The benefits of securitisation . . . 10
1.4.2 SPV’s Evolution . . . 12
1.4.3 Parties involved in securitisation transactions . . . 12
1.5 Into the Research’s core point . . . 14
1.5.1 Funds’ Highlights . . . 16
1.5.2 Two big structures’ branches . . . 18
1.5.3 Regulatory Framework . . . 19
1.5.4 The Luxembourgish legal framework . . . 22
1.5.5 The SIF’s breakdown . . . 22
1.5.6 The Real Estate Investment network . . . 27
2 the literature review 31 2.1 Literature contributes . . . 31
2.2 The real estate investment style . . . 34
2.3 How to measure the Active strategy performances . . . 36
2.3.1 The Jensen’s Alpha measure . . . 37
3 data description and statistics 39 3.1 The Sample . . . 39
3.1.1 The data’s treatment . . . 40
3.1.2 Summary statistics . . . 44
3.1.3 The Correlation matrix . . . 51
3.1.4 Performances’ analysis . . . 54
4 empirical strategy 59 4.1 Methodology . . . 59
4.1.1 The CAPM . . . 60
4.1.2 The Fama & French . . . 60
4.1.3 Industrial factors . . . 61
4.1.4 Shiller house price index . . . 61
4.1.5 All Share Luxembourg . . . 62
4.1.6 Volatility VIX . . . 62
4.2 The linear regression . . . 63
4.2.1 The Ordinary Least Squares . . . 64
5 empirical results 67 5.1 Single-factor models . . . 67 5.2 Multi-factor models . . . 71 6 investment gains 79 6.1 Markowitz . . . 79 6.2 Scenario analysis . . . 81
Table 1.1 Net Assets of Worldwide Regulated Open End Funds . . . . 1
Table 1.2 Overall prospect 2017 . . . 7
Table 1.3 Target sectors . . . 17
Table 1.4 IFRS’s trend in Luxembourg . . . 18
Table 2.1 Investment styles . . . 35
Table 3.1 Identification of the Sample . . . 40
Table 3.2 Market data comparison . . . 42
Table 3.3 Sample’s observations . . . 43
Table 3.4 Summary statistics funds observed . . . 44
Table 3.5 Extract from table 3.4 . . . 46
Table 3.6 Level of correlation . . . 52
Table 3.7 Correlation Matrix . . . 53
Table 5.1 Single - Factor models: CAPM, Shiller Index, All Share Luxembourg, Volatility VIX . . . 76
Table 5.2 Multi - Factors models: Fama & French, Industrial coefficients 77 Table 6.1 Global minimum Variance point (extract from 6.1) . . . 81
Table 6.2 Strategies (A,B,C,D), weights and observations . . . 82
Table 6.3 Chronological portfolio returns . . . 84
Figure 1.1 Global Investment share in Alternative Real Estate Assets . 3
Figure 1.2 GDP Growth - Developed and Emerging Market . . . 4
Figure 1.3 Share of Global Inv. Vol. - Emerging Market . . . 4
Figure 1.4 The European Real Estate investment Q3 – 2016 (ebn) . . . 5
Figure 1.5 Reason for considering Alternatives . . . 6
Figure 1.6 The Securitisation process . . . 9
Figure 1.7 Yearly evolution of securitisation vehicles . . . 12
Figure 1.8 Growth in the number of Luxembourg Real Estate Fund Units . . . 15
Figure 1.9 Growth in the net assets under management in Luxembourg Real Estate Fund . . . 16
Figure 1.10 Investors’ categories . . . 23
Figure 1.11 The Luxembourgish SIF’s categories . . . 23
Figure 1.12 The Umbrella’s structure . . . 25
Figure 1.13 The Pan-European regulated Real Estate investment structure 28 Figure 2.1 Property investment framework . . . 35
Figure 2.2 (Jensen1968) Model . . . 37
Figure 3.1 CAPM’s Equation . . . 40
Figure 3.2 Leptokurtic distribution . . . 49
Figure 3.3 Platykurtic distribution . . . 49
Figure 3.4 Types of distribution according the Kurtosis index . . . 49
Figure 3.5 Funds performances 1-20 . . . 55
Figure 3.6 Performances One-by-One . . . 56
Figure 4.1 Regression line . . . 65
Figure 6.1 The efficient frontier . . . 81
Figure 6.2 Investment strategies and benchmark comparison . . . 84
Over the last decades, the Fund industry has increased its volume and business interested considerably and the sector has seen many countries grow and expand by offering to the investor a multiplicity of services related to the Fund Adminis-tration. Since the introduction of the regulations which tried to impose a series of law to moderate and maintain secure the sector, Luxembourg has been the first European country which adopted the European Fund’s Directive (Management 2017): it issued a detailed Regulation which specified every particulars in order to set up an a Fund company in Luxembourg. The sudden growth phenomena started since the implementation of the European Directive governing UCITS in 1998and nowadays the country being a member of the European Union, has seen a constant growth in terms of the related funds’ services: legal, fiscal, administra-tional and consultative. This trend, is attracting more companies every day and according to last EFAMA’s report, currently, at the end of the last year (2016) the Net asset of fund industry located in Luxembourg was equal to 3,701,076 (Billion of Euro) which represents the 27.56% of the total assets managed by investment fund in the European Union. Enlarging the view, the small Grand-Duché located in the heart of the Europe contributes globally with 9.10%.
This dissertation, aims to consider the strategic active performance measures proposed for the asset management industry and it will try to evaluate their ef-fectiveness for constructing an investment strategy on the Luxembourgish REITs. In order to do so, we will use the models and techniques developed within the Capital Asset Price Model (Sharpe1964) and the relative implementations of if.
The present research is going to analyze a sample of 20 Real Estate Funds domi-ciled in Luxembourg. The aim of the document will be a deep investigation about the realized returns in terms of Manco’s capability to outperform the benchmark that has been prefixed. The research is going to be focalized through 6 indexes which will try to comprehend the funds’ trends according to the different models adopted.
1
I N T R O D U C T I O N T O R E A L E S T A T E
I N V E S T M E N T F U N D S
The following chapter will highlight the environment, the tools and the mecha-nisms which will be useful in order to focalize the research. Executing a merely quantitative focus, the purpose of this section will be to arrange the mentioned fund’s structure within a synoptic grid in order to understand which have been the core aspects, the elements and the characteristics that the REITs must have.
1.1
a brief global overview
As previously introduced the next pages will aim to describe the worldwide con-text, the trends are taking places and which have been the trailblazing reasons per-mitted the funds’ development. During the past years the Real Estate Investment Trust (REITs) have had a strong come-back from the financial crisis and showed an impressive upswing. The REIT’s structures responded to the ever dynamic market context and are evolving overtime. Thanks to some particular aspects and "benefits" which will be studied, the mentioned regimes have produced an attrac-tive returns to their investors. As we can see in the table below (tab. 1.1), the Real Estate Fund Industry market is growing constantly and over the last decades we are assisting to what the analysts call "Sector Revolution".
2015 2016 Q1 Q2 Q3 Q4 Q1 Q2 All Funds 37,674 37,064 34,881 37,610 36,657 38,108 Long Term 33,446 32,966 30,558 32,951 32,210 33,608 Equity 15,576 15,137 13,653 15,051 14,378 14,872 Bond 7,876 7,678 7,333 7,756 7,793 8,333 Balanced/Mixed 6,754 6,870 6,401 6,756 6,579 6,861 Guaranteed 89 77 70 68 64 63 Real Estate 374 389 391 489 495 524 Other 2,751 2,789 2,650 2,830 2,901 2,955 Money Market 4,228 4,098 4,323 4,659 4,447 4,500
All the number represented are expressed in Billions of Euro
Table 1.1: Net Assets of Worldwide Regulated Open End Funds
Keeping the focus on table 1.1 the environmental context permitted to the Real Estate market to grow up more than 40% over the last 2 years. Moreover, thanks to a Euro-dominated basis, the equity funds increased their asset by 3.4% at the end of the second quarter of 2016. The article issued by Forbes lights up an explanation for the funds’s growth and it will try to justify combining macro overview and asset management’s decisions the data just exposed in the Table 1.1.1
The macro-view is based on the research conducted by Colliers2
which affirms that the Real Estate fund market is continuing to be an attractive choice thanks to the positive sentiment toward Real Estate market.
The global transactions set to exceed 2014 levels by year end nearing pre-financial crisis levels. More than half of the respondents with multi asset portfolio also the will increase their Real Estate asset allocations in the next 12 months. The promis-ing sentiment is based on the positive transactions that have already taken place in the first 9 months of 2016, which are confirming this feelings with 625 $ billion of direct property investment worldwide, representing an 11% increase over the same period of 2015. 3
Moreover, an important key finding is represented by the more of than 600 Investors surveyed: the 52% of them confirmed the willing to increase fund allocations to Real Estate in 2016, while the 11% plan for a decrease of it. The Real Estate investment is on track for a continued growth in the next years.
As just asserted thanks to the contribution of the Table 1.1, the Real Estate sec-tor is developing an expansion period after the crisis in the 2009. It is important to describe the environmental context in order to outline a proper analysis, espe-cially in the Real Estate funds industry, which is mostly composed by investment in buildings and infrastructures and they are affected by demographic and finan-cial aspects. According the recent studies conducted byPGIM the sector, during the 2016, has been a mixed and various year for the global real estate market, especially due to a series of many aspects which are important to mention:
• Financial markets volatility is the starting point, many events have been concerned the Real estate section, the worries regarding the China’s growth, the Brexit in UK, and the U.S. presidential election surprised the market in the latter part of the year. The investor’s sentiments has been pulled back due to a uncertainty and investment performance has cooled.
• Fortunately, the financial markets, have reacted positively and the signs of distress are minimal. The level of uncertainty is still high, even higher than
1 Source:Why The Best Investment In 2016 Might Be Global Real Estate.
2 Source:Colliers-International
one year ago, but the economic backdrop remains broadly supportive thanks to the positive and global growth outlook in the emerging markets, which are offsetting the deceleration in the developed market.
• Starting from the United States, the global bond yields, have started to in-crease from a historically low level and the expectation that bond yields will increase further point towards higher required returns on real estate investments.
Based on the characteristics and discrepancies in the Real Estate market hap-pened over the last decades, the investors started to diversify their portfolio cre-ating and adopting different strategies in order to increase and protect their ex-pected returns. As the report issued byPGIMconfirmed, one of the macro-trends which is possible to denote in the last years is the new investor’s perception:
” The Investment in alternative Real Estate sectors is rising as investors look to tap into growth potential arising from favourable structural trend.”
Thanks to the expectation of rising interest rated hedging closer, the mix of low returns and rates of occupier expansion in mainstream office and retail mar-kets means that investors are increasingly on the lookout for assets and strategies which offer a long-term growth potential.
0.08 0.1 0.12 0.14 0.16 0.18 0.2 0.22 0.24 0.26 2008 2009 2010 2011 2012 2013 2014 2015 2016 Investment shares (%) Hotellerie sect. Alternative Funds
Sources: Real Capital Analytics, PGIM Real Estate; As of December 2016
Figure 1.1: Global Investment share in Alternative Real Estate Assets
The expected return in the alternative real estate assets – which include non-traditional and emerging sectors, such as self-storage, medical office, data-center and senior housing – is growing so quickly as they offer to the investors a way to
tap into the expansion arising from structural trends relating to high technology and demographics. As we can note in the figure 1.1 the share of global capital going into hotels and other alternatives has risen from 9% to 17%. Over the next years, the increasing investment flows should gradually bring more liquidity to the alternative asset markets. Of course, if transparency level is going to erode some of the excess returns that is relate to the opacity of these sectors, in the absence of a stronger economic growth story, is possible to deduct that the interest in alternatives will continue to grow supportively.
1.1.1 The Emerging Market’s power
In order to justify what just present through the figure 1.1, the next section is going to highlight which is the trend that should be considered from the investor point of view in order to maximise his return. Over the last decade the emerging market economies grew faster than the market development rate. It means that gap between these two in 2016 has been evaluated equals to 4.2%. 4
Figure 1.2: GDP Growth - Developed and
Emerging Market Figure 1.3: Share of Global Inv.
Vol.
-Emerging Market
This has been a good result if we consider that into 2015 – due to the commod-ity falling prices combining with the China’s slowdown – the gap was close to 1.5% (Kane2016). Contextualising the trend we can understand that the emerging markets are still attracting capitals. As confirmed by the report:
” [..] There are signs that emerging markets are gathering momentum once more”.
What PGIM just claimed is justified considering that the commodity prices are rising from low base, benefiting raw material producer like Brazil, in the same time the China’s fiscal stimulus act has shored up previously faltering growth, albeit at the expense of rising debt ratios. This particular market’s sector is not
4 An emerging market is a country that has some characteristics of a developed market, but does not
excluded by risks but so far the emerging market growth is speeding up and at the same time the growth within the developed markets remains weak.
1.2
the european market
In order to get closer to the main researchs focus, is really important to go through the European market. The market needs to be described because it presents differ-ent aspects which are so important to mdiffer-ention in order to have a clearer overview regarding the mentioned Alternative sector. According the last reports published by PwC, the European’s Real Estate industry is attracting many investors mainly thanks to the higher yields they can offer and they are a direct consequence of a low interest rate combined with the low inflation environment. The Real estate sector is directly affected by the political moves, they influence the Business envi-ronment and the citizens one. The Real Estate sector is a crossing industry which refers to Business and Non-Business affairs.
Figure 1.4: The European Real Estate investment Q3 – 2016 (ebn)
Note: Figures are provisional as at 21st October 2016 Sources: Real Capital Analytics
Thanks to the contribution of the Figure 1.4 we can outline a strong and re-markable Real Estate’s investment overview in the euro-zone which will be an important main-stone in order to introduce opportunities and market-volumes.
The survey conducted by PwC takes into consideration the European market and it can show us the drivers which are followed by the investors in order to
0 20 40 60 80 100 Demographic demand drivers
Stable income return Diversification Higher yields Other 69 46 46 45 9 Data expressed in %
Figure 1.5: Reason for considering Alternatives
Source: Emerging Trends Europe survey 2017
consider the alternative sectors. As highlighted in the previous figure, the demo-graphic demand combining with the geodemo-graphical factors are so relevant for the investors, they permit to extract information and build the macro-view. As we can see, the reasons which are making attractable the alternatives are the more stable and predictable income return, combining with an easier portfolio diversification which will meet the client’s expectations.
Remaining focused on the European market, the following section will cover a brief overview to introduce the Real Estate prospects in terms of market and place to be. Despite the many political and economic uncertainties clouding Europe’s future, the real estate industry is upbeat about most of its major markets but Brexit is re-shaping the European real estate map.
Furthermore, within the last report issued by PwC, Germany is replacing the United Kingdom as Europe’ s number 1 safe haven. As we can see in the Figure 1.2. As we can see, Berlin is the capital where the data shows the biggest growth over the next 10 years; this position reflects a trendy and dynamic global gate-way to Europe. Scrolling down the ranking list we can note that Berlin is not the only one German city who belongs to the podium but that there are still in cities as Hamburg or Frankfurt. Having an overview regarding the cities (dimension, lifestyle, infrastructure services) is possible to denote that today is not so much Europe’s big gateways but its smaller capitals and second cities that are being ranked highly. Factors such as physical and social framework, quality of life, sta-bility and sustainasta-bility have entered the equation. Is important to mention that another reason that explains this growth is due to the purposes of the companies: we are assisting to a revolution of the offer thank to tailored strategies set up tak-ing into account demographic and social changes. A demonstration on what just said is represented by Dublin: fast-growing population and friendly tax regime
Table 1.2: Overall prospect 2017
Overal Rank Investment Rank development Rank
1Berlin 4.21 1 4.16 1 2Hamburg 4.02 2 3.87 2 3Frankfurt 4.01 3 3.79 4 4Dublin 3.91 5 3.82 3 5Munich 3.94 4 3.78 5 6Copenhagen 3.77 9 3.78 6 7Lisbon 3.80 8 3.62 8 8Stockholm 3.73 10 3.66 7 9Madrid 3.82 7 3.51 10 10Lyion 3.70 11 3.60 9 11Amsterdam 3.84 6 3.45 14 12Oslo 3.62 12 3.50 11 13Zurich 3.60 13 3.45 13 14Vienna 3.52 17 3.49 12 15Milan 3.60 14 3.35 16 16Barcelona 3.59 15 3.29 17 17Paris 3.48 19 3.35 15 18Helsinki 3.55 16 3.13 21 19Prague 3.49 18 3.15 19 20Warsaw 3.43 21 3.19 18 21Budapest 3.45 20 3.14 20 22Birmingham 3.15 24 2.93 22 23Manchester 3.17 23 2.88 25 24Edinburgh 3.19 22 2.82 26 25Rome 3.09 25 2.92 24 26Brussels 3.04 26 2.93 23 27London 2.79 27 2.58 28 28Istanbul 2.51 29 2.71 27 29Athens 2.68 28 2.29 29 30Moscow 2.29 30 2.15 30
Note: scored cities’ prospects on a scale of 1= very poor to 5= excellent
combining with innovative companies coming from US (Google, Facebook and Amazon) that based their headquarters in the Irish capital.
1.3
data providers, agents and associations
We have already mentioned the main elements that are going to take place in our research (definitions and acronyms). However, there are still some notions that
needs to be reviewed. Here follows a short description of the agents, subject and association which will be part of our dissertation.
the commission de surveillance du secteur financier is a public institution which supervises the professionals and products of the Luxembourg finan-cial sector. It supervises, regulates, authorises, informs, and, where appro-priate, carries out on-site inspections and issues sanctions. Moreover, it is in charge of promoting transparency, simplicity and fairness in the markets of financial products and services and is responsible for the enforcement of laws on financial consumer protection and on the fight against money laundering and terrorist financing.5
the association of the luxembourg fund industry represent the official body for the Luxembourg investment fund industry. It has been set up in Novem-ber 1988 to promote its development. The Association, provides data and statistics to potential investors and thank to its progress over the years, Lux-embourg is become an international centre of reference, recognized as open, reliable and innovative by investors and policymakers. 6
the european fund asset management association (EFAMA) represents the association fo the European Investment management industry, including the Real Estate sector as well. The association collect data from 28 individual members and 62 corporate members, they represent EUR 23 trillion in assets under management. 7
the european public real estate association represents a direct consequence of the growth of the listed property and REIT regimes around the world. The EPRA’s activities reflect its mission to promote, develop and represent the European public Real estate sector. Our underlying objective is to foster trust for and encourage greater investment in listed real estate in Europe. This is achieved by a full commitment to transparency, from EPRA and its members alike.8
the special purpose vehicle represents a very ample topic, the description of the SPV’s structure mentioned will take place in the following section. (see the paragraph 1.4)
5 Source of the information:CSSF.
6 Source of the information:ALFI.
7 Source of the information:EFAMA.
1.4
the special purpose vehicle
Before the SPV’s definition released we need to understand what is the securiti-sation process. The assets securitisecuriti-sation began with the mortgages’s structured financing pools started in the late ’70s. At that time this process was used espe-cially for mortgages’ purpose but right now we can see it through innumerable types of collateral as receivables (debts, properties and rents) as well as in differ-ent types of CDOs such as car loans, credit-card receivables and consumer loans. We can agree upon that the securitisation process works as a type of structured financing in which a pool of cash generating financial assets is transferred from the "Originator" to a "Special Purpose Vehicle". This SPV finances the acquisition of these assets by the issuance of the new securities, whose interest and principle payments are derived from and backed the the assets that have been transferred.
Substantially the structure just mentioned is in charge of the securities’ financ-ing and acquisition processes that are backed by the assets transferred and pay-ments derived from these underlying assets. More generally, SPVs may only ac-quire a risk without the acquisition of the reference assets (transferring the perfor-mance through derivatives instead). Thanks to the operation just described, new financial assets are created and available to the market. The Securitisation may be described as a financing structure that allows for the conversion of receivables and other assets into tradable securities via Special Purpose Vehicles (SPVs).
Investors SPV Originator Securities Assets Cash Cash Obligors (Final Client) Good & Services
Payment over time
Figure 1.6: The Securitisation process
Source: personal elaboration
Thanks to the contribution of the figure 1.6 we can comprehend that SPV is a legal entity established in the area of securitisation transactions. This process, represents a milestone with the investment schema. From the Originator’s point of view, the securitisation permits to facilitate the transfer of specific ownership risk to parties who have higher capabilities to manage these risk and moreover it grants the access to capital markets with a potential better debt rating than the general corporate rating of the originator. From the SPV’s perspective, the securiti-sation process permits to splits the credit risk into several tranches classified with
different risk profiles. This ”new emission” permits to attract different investors. Substantially, there are three macro categories which will be called tranches:9
• Senior’s tranches;
• Subordinated, mezzanine;
• Junior.
Usually, a very common allocation of tranches is composed by 80% of Senior and with the remaining part will be split into the others classes. Of course, the senior classes have the fist claim on the cash that the SPV receives and the more junior classes are allowed to receive the repayment after the more senior classes have been repaid. This represents a kind of cash flow waterfall. Important to mention is that the senior tranche (the one that is usually very high-rated) is ensured by the Treasury. It does not means that the Government helps this operation, this represents just an insurance form which permits (just for the Senior’s tranches) to facilitate the securitisation processes. All the tranches below are classified with a lower rating and they are designed to first absorb any credit losses derived from upper classes. As a consequence, these tranches have higher return margins which compensate the additional risk supported by the investors.
1.4.1 The benefits of securitisation
Taking for granted that the establishing an SPV entail a certain amount of costs and expenses for administration, management and maintenance, the benefits could gain the involved parties overcome them. The benefits related with the process are really different and they change according the different point of views (Investor, originator, and borrower) but the so far, the main SPV’s purpose is the demand for lower capital cost.
originators benefit of the securitisation process because the can improve their capability to operate in the business, the process improves the return on capital by converting an on-balance-sheet lending business into off-balance-sheet fee income stream that is less capital-intensive (Luxembourg2017).
• Efficient access to capital markets: there are no links between the origina-tor’s credit rating and the one given to the securitised asset, it means
9 it represents one or a number or related securities offered as a part of the same transaction. They
could be defined as different ”classes” of notes, each identified by letter with different bond and credit ratings (Class A, Class AA, Class B)
that there will be less founding cost. Concretely speaking if the origi-nator evaluated the company 00X00with B but they have (for that oper-ation) a cashflow rated A, it would be able to borrow at A.
• make liquid the illiquid assets. thank to the securitisation, assets that are not sellable may be combined together with others to create a diversi-fied collateral pool funded by note issued by the SPV.
• permits to generate additional assets the securitisation process permits to the credit lines to be recycled quickly to generate additional assets. The capital raised can be used for any allowable purpose(repurchasing stock, purchasing additional assets or completing capital projects as well).
• transfer risk to third parties: financial risk from defaults on loans or contractual obligations by customers can be partially transferred to in-vestors and credit enhancements.
• Bank’s capital requirements decreasing represents the point mentioned at the beginning of the section: the bank’s supervisory authority estab-lished a minimum amount of capital that needs to be ”stocked” and appears to the balance sheet. This amount is related and reflects the amount of credits that the banks or insurance companies own in their balance sheet. Executing the removal of those assets (thank to the SPV’s contribution), the company’s balance sheet, that amount of money can be used for other purposes.
investors can benefit of a series of advantages related with the larger combina-tions of yields and risk. They can of course be perked thanks to:
• Tailored investment sources: the investors who usually do not invest in direct originator’s securities, have a different perspective and they can be attracted by the characteristics of securitized assets.
• Portfolio diversification permits to categorize different habits according the different investors’ classes: hedge funds or institutions, tend to invest in bonds issued by the SPV because they are uncorrelated (as mentioned at the beginning of the section) to their other investments.
• Potentially higher returns: thanks to the specified kind of security issued by the SPV (which is the results of a securitized assets) an investor may potentially gain an higher profit on investments in specific pool of high-quality credit-enhanced assets.
borrowers benefit from the increasing availability of credit terms, which lenders may not have provided if they had kept the loans on their balance sheets.
1.4.2 SPV’s Evolution
Thanks to the research conducted by Pwc, the Luxembourg SPV’s market presents a positive trend of the past decade, have been confirmed in 2016.
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 −100 0 100 200 300 25 98 183 170 124 99 133 106 143 159 180 137 175 0 −1 −2 −11 −18 −32 −57 −26 −48 −99 −67 −97 −73 Years Number of SPV
Figure 1.7: Yearly evolution of securitisation vehicles
Source: ECB Database, CSSF, RCSL, PwC Analysis
The proof of the huge success of the Luxembourg market place is that in the last 5 years, we can resume that more than 100 vehicles has been established annually. The trend has been confirmed in the 2016, with a 102 new SPV. This trend clearly demonstrates that Luxembourg issued an efficient law which has been able to regulate the sector and moreover attract always more investors. The country, according to the last Pwc’s research has become the European leader for the securitisation and structured finance vehicle.10
1.4.3 Parties involved in securitisation transactions
In addition to the just mentioned subjects, within the securitisation process are involved many other players which deserve to be listed as well. In the following
10 The research confirmed that the Grand-Duché is become the leader due to the high degree of
flexibil-ity and certainty that provides to all the originators, investors and creditors. Source: Securitisation
lines, we will touch just the leading parts of the securitisation process; namely, the subjects which cover the fundamental role. It does not mean that the other players are less important (all the agents play an important role with specific actions required) but in order to keep the focus on the Real Estate fund industry, we will describe just the ones which have a critical and irreplaceable part.
servicer is the entity that collects principal and interest payments from the obligors and administers the portfolio after the transaction has closed. In some cases, the Servicer could be replaced by the originator. The services that these companies offer include customer service and payment processing for the obligors in the securitised pool and collection actions in accordance with the pooling and servicing agreement. Furthermore, the servicing can also include default and preparing monthly reports. These services are typically compensated with a fixed fees.
the borrower is the subject that owe the originator payments in the underly-ing loans/assets, it means that they are therefore ultimately responsible for the performance of the issued securities. As obligors, they are often not informed about the sale of their payments obligation. The originator, often maintains the customer relationship as servicer.11
originator represents (as previously introduced) the entity that assigns assets or risk in a securitisation transaction. We can assume it as the lender who originally underwrote and securitised the loans. All the obligation arising from such loans are, therefore, originally owed to this entity before the SPV’s transfer. In same cases, this entity, could be considered as the ”third party” who buys the pool with the intention to securitise it. In this operation the Originator represent the ”sponsor”.
investor buys the securities issued by the SPV and he is entitled to receive the repayments and interest based on the cashflow generated by the underlying assets.
the trustee conducts a relevant role in the process: it is mainly involved to maintain and preserve the investors’ rights. These structures oversee the receipt and disbursement of cashflow and monitors other parties to the agreement to ensure that they comply with appropriate covenants. If some problems regarding the transactions will take place, the Trustee focuses
ticular attention on the obligations and performance of all parties associated with the securities issued. 12
rating agency is in charged to asses the securities issued, the agency will allo-cate a rating to them. This process takes place mainly because a wider range of investors require a minimum rating of investment grade. Nowadays, the rating process is relied by agencies such as Standard & Poor’s, Fitch, Moody’s. In order to evaluate the securities, these agencies analyse the following fac-tors:
• The pool’s underlying quality such as repayment ability, the maturity diversification, expected defaults and recovery rates;
• Abilities and strengths of the originator/servicer of the assets;
• Legal risks in the structure;
• ManCo’s ability to manage the portfolio;
• Quality of credit support (e.g. nature and levels of credit enhance-ments).
custodian bank represents the financial institution that holds customers’ secu-rities for safekeeping to minimize the risk of their theft or loss. The bank could hold the securities in electronic or physical form. Since they are re-sponsible for securities which value can be really high, custodians generally are large banks with an high reputation.
auditor covers an important part in the securitisation procedure, every SPV’s ac-counts located in Luxembourg has to be reviewed by an independent auditor. The auditor will analyze the transactions related with the securities. They need to be nominated by the securitisation company’s management body or by the securitisation fund’s management company.
1.5
into the research’s core point
Zooming the research into the main question, Luxembourg, since the introduction of the alternative’s regime, has emerged as the leading domicile in Europe allow-ing direct and indirect investments within national and international Real Estate portfolios. The beginning of the revolution, started when European Union wanted
12 The Grand-Duché issued a specific law which regulates and defines the Trust Corporate Services
operator as a natural or legal person that provides a registered office at its own address to one or
to implement the already regulated Alternative Fund sector guaranteeing a safer environmental context for the investors. In a short time, Luxembourg thank to its capability to aggregate the Directive issued a well structured regulation which attracted many investors.
20002001 20022003 20042005 20062007 20082009 20102011 20122013 20142015 2016 0 50 100 150 200 250 300 350 5 3 5 6 14 29 45 83 121135 166183 218 252 280296 315 Years Number of units
Figure 1.8: Growth in the number of Luxembourg Real Estate Fund Units
(The number of single funds plus the sub-funds of umbrella structures)
The small Grand-Duché located in the heart of Europe has a friendly tax and legal framework and so it fulfills a wide range of needs for investors in terms of regulated and non-regulated Real Estate Fund Structures. The institutional, professional and private investors who are interested on the creation of an inter-national real estate portfolio will find a range of sophisticated investment vehicles in Luxembourg which will meet their specific preferences. The capabilities to diversify and to be flexible permit to Luxembourg to be considered the first Euro-pean domicile for international real estate investment vehicles.13
The most crucial choice in order to set up an investment vehicle is to decide the macro-environment in which it is going to work:
• Non-regulated entity;
• Entity regulated by the CSSF.
According the different nature/structure of the entity (as per the cases just men-tioned above) they have to follow the dispositions and regulations issued by the CSSF. The choice that the investors have to face reflects on the methods by which
0 1 2 3 4 5 6 ·104 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 280 146 396 522 850 1.557 3.307 8.131 14.762 14.839 17.850 20.925 24.082 28.743 32.685 41.801 49.597 e (Bn)
Figure 1.9: Growth in the net assets under management in Luxembourg Real Estate Fund
Source: CSSF
capital has to be raised, the type of investor targeted the investment to be made and in particular the tax considerations. Thanks to the dedicated SIF Law issued in the 2007, Luxembourg has been able to cope with a great demand for alterna-tive investment vehicles from investors around the world. A demonstration of the friendly and efficient structured created can be represented through the graph 1.5 above. The number of the fund domiciled in Luxembourg is increasing overtime since 2000. This is linked through the significant number of regulated funds in the real estate which have been created under this regime.
1.5.1 Funds’ Highlights
According the last ALFI’s annual research, in Luxembourg the 38% of the col-lected sample funds have been set up as a ”Fonds Commun de Placement”, and usually they are combined with the SIF regime. The REIFs’ trend is in line with the macro-trend just exposed (figure 1.5), since the SICAVs’ forms now account for 46%. Moreover, the data are showing anyway that the 81% of the Direct Funds fall within the SIF regime which consolidate the trend in the figure. Marginally we can see that the big improvement has been registered since 2007 (year which correspond to the SIF’s introduction)14
the investment strategies adopted in Luxembourg show us that the funds that are domiciled in the Grand-Duché are investing in a mixed and varie-gated assets but the majority of them, in order to reduce and monitor the risk related on the investment activity, they adopted a Multi-Sector strategy.
Sector Target
(%)
Multi Sector 50
Other single sector specialist 8
All sectors 4 Office only 11 Retail only 12 Industrial only 2 Residential only 10 Hospital only 3
Source: ALFI REIF survey 2016
Table 1.3: Target sectors
Keeping in mind the data of last year, we can deduct as the percentage (that was equals to 61%) of Multi Sectors’ investments had a 11 points decrease. As emphasized within the survey, many Mancos prefer to invest in specified categories of assets instead of distribute the resources in different projects through the multi-sector strategy. The data collected from the Luxembourgish association reflect funds that are domiciled in the Grand-Duché, the 80% of them are investing in Europe, whereas 9% of the funds invest globally and another 6% in the Asia Pacific region.
the fund structures by means of which the funds are established are usually Umbrella’s design. 15
Although the mentioned structure permits to be flex-ible and very convenient thanks to cost consideration, the trend is showing us that we are assisting to a simplification of the structures and strategies. As reported in the data distributed by ALFI, the 73% of the Direct Funds have a singe compartment compared with the 68% in the previous year. the fund reporting is considered a very important section. On a research’s
purpose the reporting frequency and the mandatory information which con-stitute the essential parts of the statements represent a relevant part of the analysis will be conducted in the following chapters. In Luxembourg (based on the last ALFI’s Survey - 2016) the fund’s proportions which are governed by IFRS Regulation has slightly increased from the previous year:
Years IFRS’s compliance (%)
2016 44
2015 40
2014 42
Source: ALFI REIF Survey 2017
Table 1.4: IFRS’s trend in Luxembourg
Moreover, has been reported that during the 2016, the Direct Funds report a quarterly NAV. An important trend that needs to be considered is that since the 73% of the funds are Direct and closed-ended the monthly basis NAV (equals to 11%) is principally due to specific investor’ demand, especially for performance measurement rather then unit redemption. The Luxem-bourg domiciled funds (for 66% of them) have a annual valuation and just 3% of them require monthly valuation. Furthermore, has been denoted that in country’s research the fund service of a independent appraiser (for the 83% of the cases they belong to RICS).
the investors’ indenty-kit is difficult to outline properly due to the varie-gate categories they belong. Geographically, the 83% of them are Euro-pean and the remaining shares comes from America, Asia and the Middle East. The Luxembourgish funds are used for small groups of institutional investors and the most of them present (83%) less than 25 investors. Al-though what we affirmed above, only the 2% of the fund located in the Grand-Duché have more then 100 investors. The remaining parts (that are still well distributed) has a significant portion of the funds in one country (47%) and the 11.5% are sold in more than six countries. As introduced at the beginning, these figures confirm the attractiveness of the Grand-Duché’s REIFs.
1.5.2 Two big structures’ branches
As previously introduced in the section 1.4 regarding the SPV, the first and big choice which could influence the investment’s vehicle and cascading all the strate-gies, structures and offers to investors is represented by the decisions to estab-lished the investment vehicle belonging to:
the direct real estate fund involves the acquisition of that specific property. For equity investments, it means acquiring an ownership interest in an en-tity that directly owns an asset such as an apartment community, shopping
centre or office building. Debt investing refers to capitalizing a loan that is collateralized by real estate, such as land or an existing property. This kind of investment just presented includes regulated fund vehicles, Manager-Regulated AIF’s, RAIF, and SICARs, which invest in real estate assets either directly or via intermediary entities (special purpose vehicles – SPVs). the indirect real estate fund involves buying shares in a fund or a publicly
or privately. They typically buy shares of non-traded or publicly-traded real estate investment trust (other REITs) stocks. The structures just described are in the business of owning and managing portfolios of real estate prop-erties. Therefore, the traditional REITs are constituted by an investment in the operating profitability of the landlord and not directly in the underlying assets themselves (as per the previous example). Basically, the Indirect Real estate funds is characterized by investments in listed Real Estate securities.16
1.5.3 Regulatory Framework
Keeping the focus on the investments’ considerations that has to be conducted before to set up the vehicle, the decision of the Regulatory Framework takes part of the list. Mainly, in the Grand-Duché, there are 2 different structures and according to their nature, the vehicles is subject to different laws and entities:17
• Regulated;
• Un-regulated Vehicles;
The distinction just mentioned above is useful to easily classified the vehicles and their structure:
the regulated environment is leaded by the CSSF which authorized and su-pervised the investment vehicles. The laws and regulations which have to be applied to the funds domiciled in Luxembourg are comprised of laws, CSSF’s circulars and some Grand-Ducal regulations as well:
• the 17 December 2010, ”The 2010 Law” represents the primary regulated law applicable to the regulated funds, it is related to Undertakings for Collective Investment (UCIs);18
16 Source:Crowdstreet.com
17 The following description will emphasize regulation taking into into consideration the
Luxem-bourgish laws issued by the government. From the European point of view, has been issued one Directive which regulates the sector identifying the Subjects involved in the structure, this is the
case of theDirective 2011/61 /61which has been received by CSSF into the12July 2013 - Manager
Regulated AIFs
• with a special regards in the Real Estate sector, the ” The 2010 law” represents a complement of the law issued the 13 of February 2007 on which describes the Special Investment Funds (SIF) as amended the ”The SIF law”;19
• the 15 June 2004, ”The SICAR law" which regulates the vehicles’ struc-tures belonging to SICAR, Société d’Investissement en Capital à Risque. 20
Going in depth, the interests in funds that are subject to the ”The 2010 Law”, can be sold to any type of investors. The first part of the law ”Part I” states that the funds (UCITS) could be classified as European, it means that they own a kind of passport which permits them to be sold to any type of in-vestors in any EU Member State after complying with certain formalities. As explained by the law, these funds are required to comply with detailed investment restrictions. The second part of the regulation, the 2010 law ”Part II” affirm that these funds must comply with each relevant member state’s local distribution rules and are required to comply with certain investment restrictions (this part is less rigid than the first one). Shifting our focus on the second law we mentioned, the SIF law state that the Interests in funds which are subject to the SIF law may only be sold to ”well-informed in-vestors”. Within the SIF regulation, the vehicles are no subject to general investment restrictions, they need to ensure an adequate risk diversification and disclosure. The vehicles that constitute exceptions are subject to review by the CSSF on a case-by-case basis. The last vehicle is constituted by the SICAR which is not considered as a fund. This vehicle is an investment vehicle reserved to qualified investors which intent are investing in venture capital and private equity. Even the SICAR could take be established fol-lowing different legal forms (such as the Société en Commandite par Actions - SCA, Société en Commandite Simple - SCS, Société Anonyme - SA, Société à Responsabilit é Limitée - Sàrl or others) and while regulated, is not subject to diversification requirements.
the un-regulated schema represents a way to by-pass the CSSF’s supervision. This structure are typically established as companies or partnerships under:
• the 10 August 1915, ”The commercial Companies”. 21
The law just quoted, allows the vehicles to take the form of private limited companies (S.à.r.l.), or partnership limited by shares (S.C.A.) or as a form of
19 The full law is available to”The SIF law”
20 The full law is available to”the SICAR law"
limited partnership with or without legal personality (S.C.S or S.C.S.p). The law defines that:
”[..] when companies have their own purpose the holding and financing of partecipations in other companies (with in their turn may own real estate assets), those companies are referred to as SO.PAR.FI’s .”
SO.PAR.FI’s and Limited partnership cannot benefit of a special legal of tax regime. The Société de participations financiéres permits to benefit (as any other fully taxable Luxembourg companies), from the participation exemp-tion regime on qualifying participaexemp-tions. Although these schemas belong and are subject to different law, the way in which they operate in the fund is pretty similar. The un-regulated vehicles offer greater flexibility in terms of choice of service providers and lower established costs which is completely different from the investment vehicles that are subject to regulatory over-sight and restrictions. Moving on the regulated schema, the vehicles mainly benefits, from a favorable tax status and an high level of investor protec-tion. For what concerns the investors’ dimensions and capital structure, the un-regulated schema tend to incorporate small group of investors and very simple capital structure. What just mentioned regarding the dimensions’ characteristics is just a trend, potentially there could be cases in which the unregulated vehicles may have a higher total size than regulated funds with more investors.
the raif Last but not least is the recent regulation that has been issued in or-der to create a schema able to combine the characteristics and structuring flexibility of Luxembourg regulated (SIFs) and the SICARs: the Reserved Al-ternative Investment Fund (RAIF). This vehicle permits to avoid the fund’s approval by CSSF before the launch. The RAIF regime has been introduced by the Luxembourg Law in 23 July 2016 amended as ”RAIF Law”. The schema just introduced is not mandatory, is optional and the regime’s ap-plication needs to be mentioned within the constitutive chart. This schema permits (when is adopted) the fund initiators to establish a Luxembourg-Domiciled funds which do not need to comply with the CSSF’s approval. Moreover, this option permits the achievement of a significantly enhanced time-to-market for new fund launches.
1.5.4 The Luxembourgish legal framework
The contents just explained above are useful to introduce the different Legal fram-works allowed in the Grand-Duché while the following lines will explain which are the forms in which a promotor could set up the vehicle domiciled in Luxem-bourg. As previously mentioned, the Real Estate Funds that comply with the ”The
2010 Law”, ”The SIF law” or the the RAIF law may be established as:
• Corporate Form such as the combinations: ”SICAV-SCA” or ”SICAF-SA;
• Contractual Form such as: ”FCP”;
• Limited Partnership such as: ”SCS” or ”SCSp”.
The factor which determines the different possibilities just exposed is the Tax Regime applicable to investors. The Funds Commun de Placement and the and Lim-ited Partnership are tax transparent, while SOPARFIs, SICAVs and the SICAFs are not, they are opaque for tax purposes. The funds belonging to the Regulated category that follow the ”The 2010 Law”, ”The SIF law”, the SICAR law or the RAIF Law may be established adopting an umbrella structure inserting many sub-funds where each of them have different investment policies or are restricted to certain types of investors. This structure permits to take many advantages from the fiscal point of view because the umbrella is legally treated as a single entity but every sub-fund is responsible for its own assets and liabilities.
1.5.5 The SIF’s breakdown
As discussed at the beginning of the chapter, every country adopted the European Directive after its emission. As a part of the European country Luxembourg ac-knowledged the Law issuing a simple and efficient regulation. The small country, has not yet enacted a REIT regime per se, but the specialized investment fund (SIF) regime issued in 2007, permitted to develop specialized capabilities on RE-ITs management. Thanks to the PwC’s contribution on the matter22
, Luxembourg dispose a own regulation which is fitting so well within the European panorama. As we can note the Commission de Surveillance du Secteur Financier (CSSF) defines the Luxembourgish SIF:
”The Specialized Investment Fund is a regulated, operationally, flexible and fiscally efficient multipurpose investment fund regime for an international, institutional and qualified investor base.”
The most important and relevant difference between the SIF and the institutional fund created under ”Part II of the Law of 17 December 2010” on undertakings for col-lective investments, is that the SIF is characterized by greater flexibility regarding investment policy and a more relaxed regulatory regime.
Well Informed Investors
Institutional Professional Others *
Figure 1.10: Investors’ categories
Source: personal elaboration
We created a separate category of investors Other because it regroups the in-vestors how confirm to adhere to the status of ”well-informed” and who either invest a minimum amount equals to 125000e or have been assessed by an vestment firm, credit institution or management company which certifies the in-vestors’ ability to understand the risks associated with investing in the SIF. The legal regime
The dedicated part regarding the investors’ identification permits to dedicate the next paragraphs to amplify the legal SIF’s structure which represents a relevant point in the SIF’s construction.
SIFs’ legal forms allowed Common Fund (Fonds Commun de Placement or FCP) Investment Company with Variable Capital
(SICAV) Other SIF
Figure 1.11: The Luxembourgish SIF’s categories
Source: personal elaboration
Going through the first point of our grouping, the category belonging to the Common Fund is the typical form which permits a co-ownership of the asset with no legal personality, the fund is managed on behalf of the joint owners by a management company located in Luxembourg. Moreover, an investor who join the fund as a counterpart of its investment receives units of Fund Commun de Place-ment which represent a portion of the Net Asset of the FCP. What just described represents the meaning of the ownership hold by the investor and differently from
the corporate shares, units of an FCS do not offer statutory ”shareholder” rights. Unit holders are liable for the amount contributed into the fund. The second cat-egory in which the SIF can be executed is the investment Company with Variable Capital. Basically, thank to this framework, the SIF can be incorporated in the form of:
• Corporate Partnership Limited by shares (société en commandite par actions -SCA);
• Limited partnership (société en commandite simple - SCS);
• Special limited partenership (société en commandite speciale - SCSp);
• Private limited liability company (société à responsabilité limitée - Sàrl)
• Cooperative company organized as a Public Limited Company (société coop-erative organis ée sous forme de société anonyme - ScoopSA);
• Public Limited Company (société anonyme - SA)
According the last SIF’s amend, the SICAV’s meaning refers to the variable capital concept, so the variation in the capitalization of the SIF are organized without any specific formal requirements. Moving to the last macro-category, the SIF can be established through a mixed and no specified method it means that there could exist structures which are neither FCPs nor SICAVs. This category represents a residual group allowing the formation of a SIF under other legal forms or arrangements such association or a fiduciary contract. It could be set up also through any other corporate forms mentioned in the previous point though with a fixed capital (they will refer to as a SICAF).
The Umbrella’s design
Furthermore, for what concerns the fund’s structure in terms of type of organi-zation, the Grand-Duché offers the possibility to set up the investment vehicle as a single funds or as umbrella funds. The investment structured through the um-brella’s structure is a method that permits to incorporate one or more sub-fund or compartment into one which is represented by the umbrella.
The Figure 1.12 shows us how each compartment corresponds to a separate pool of assets and liabilities and is related to a different pool of properties or rights, which are ring-fenced from the properties or property rights in other com-partments. Although the master fund (umbrella) constitutes a single legal entity or a single contractual agreement (according the structure just seen above), is im-portant to remark that the assets of any compartments are exclusively available to
Umbrella Multi-compartment structure Sub-fund “1” Sub-fund “2” Sub-fund “n” Shareclass “ABC” Shareclass “DEF” Shareclass “GHI” Shareclass “LMO” Shareclass “PQR” Shareclass “STU”
Figure 1.12: The Umbrella’s structure
Source: personal elaboration
satisfy the investors’ rights and creditors existing in relation to that compartment or sub-fund only. Within each sub-fun there could be many classes which may be different according different kinds of investors’ rights. Moreover, such classes of units or shares may differ, inter alia, based on their fee structure, distribution policy and type or target of investors.
Income - Assets - Activities
Moving the focus on the the what the SIF can do and what it cannot do, this framework permits to invest into:
• real estate asset (lands and building) which has to be registered in the name of the SIF;
• real estate rights which could be participations in real estate companies (loans to such companies), financial activity (the object and the purpose of them have to be related to acquisition, development and sale of real estate);
• long-term Real Estate interests such as ground rents, long term leases and option over the real estate investment.
Generally speaking the SIF can invest in any type of real estate assets and follow any type of real estate investment strategy subject to compliance with principle of risk spreading. Although the SIF’s regulation does not provide for quantitative investment restrictions, the CSSF has issued further documents which permit to
guide the investor during the many process of investment. Unlike on what just explained above regarding the investment freedom that the investors can adopt, the CSSF believes that the risk-spreading principle is complied if the SIF does not invest more than 30% of its assets in:
• single property;
• the same property right;
• the same issuer of the property rights.
Important to mention is that the CSSF does not consider separate items the prop-erties which are linked with the same economic viability, moreover, there could be exemptions from the restrictions area in the cases that the SIF has just been established (e.g. the 30% rule may not apply).23
Requirements and restrictions
Although The Luxembourgish SIF is a structure that permits to the investors to be more free, it adopted requirements regarding the capital you need in order to establish the framework. As reported in the CSSF regulation, it needs a mini-mum capitalisation for a real estate SIF equals to EUR 1,25 million. Moreover, this amount needs to be reached within 12 months from the authorisation of the SIF and may be constituted by the subscribed capital increased by the share premium or the value of the amount constituting partnership interest. If the SIF is consti-tuted by an umbrella’s form, this capital requirement is applied as a whole and not the a single compartment. For what concerns the restrictions on investors, the CSSF settles (as previously mentioned) that SIF’s shares are reserved to ”well-informed” investors.
Distribution and Tax treatment
The Luxembourg’s framework established by CSSF does not mention any profit distribution obligation or restriction which can be applied. The most important thing is that the principle of the capital requirement has to fall below the legal minimum of EUR 1.25 million. More interesting is the tax treatment, the Grand-Duché’s real estate funds are not subject to corporate income, municipal business and net wealth tad on the profits derived from investment, whether such profits constitute current income or capital gains. Moreover, they are exempted from withholding tax upon dividend distribution, capital reduction, interest payment.
23 SIF’s guidance has been issued by CSSF and restrictions just mentioned are referring to theCircular
In Luxembourg the specialized real estate funds are exposed to a 0,01% annual subscription tax, that ”tax” has to be paid quarterly and is calculated on the aggre-gate net assets on the fund as valued on the last day of each quarter. The dividend distributions made by a specialized real estate fund are not subject to dividend withholding tax. The Luxembourg’s regulation is no longer imposing any with-holding tax on interests under EU Savings Directive due to the agreement that allows the automatic informations’ exchange since the January 1st 2015.24 For what concerns the tax treatment at the investor level, the regulation spitted the subjects in two areas:
the individual investors who decide to withhold profits from a specialized Real Estate fund, will be subject to a 43.6% max. In the meanwhile, the inter-est paid the fund to an individual dominter-estic shareholder who is managing the own private wealth, will be subject to a final 10% withholding tax at the fund level.
the corporate investors have a different treatment, they will be fully subject to tax on any income derived from a Luxembourg specialized Real estate fund belonging to the SICAV or SICAF’s form. It means that the all forms of gains which will be given to shareholders are fully exposed to:
• Luxembourg Corporate income tax (which cannot be more than 22.47%);
• municipal business tax (tax burden of up to 29.22%).25
Although the corporate shareholder will be subject to the net wealth tax-levied on its net assets at a rate of 0.5%, in principle, the shares and units within the Luxembourg’s ”REIT” in the form of SICAV and SICAF, should be fully subject to the net wealth tax. At the same time, the Funds Commun de Placement which are structured as a REITs are also subject to the Net Wealth Tax, but not to the extent the corporate shareholders could apply the Luxembourg participation exemption on a double taxation treaty to the fund’s underlying investments if applicable.
1.5.6 The Real Estate Investment network
Going into the details, Luxembourg’s elastic legal environment and favorable tax system, allows to every Investment project to benefit from tailor-made legal struc-ture which combines efficiency and quality of services. In order to have a clear
24 The full regulation is available onLex.europa.eu.
overview regarding the context we are referring, we could take into consideration the schema developed below.
LuxCo Feeder
Local SPV Lux PropCo Lux PropCo
Dutch SPV
FinCo Investor 1 Investor 2 Investor 3 Investor 4 Investor 5
Master
Equity Debt through banks
Figure 1.13: The Pan-European regulated Real Estate investment structure
As we can see in the figure 1.13, the level of complexity within the struc-ture of the Real Estate Investment is really high: every component represents an unique and irreplaceable piece which sustain the entire process. Even if in Luxem-bourg there is not a specialized legislation for the REITs the investment vehicles - whether regulated or not - it offers the malleability required to structure real estate investment for different kind of investors combining with a plurality of target countries. Most of the time, the result deriving from the combination of divergent vehicles already available is able to offer a more efficient and flexible tax regulation and structure. Analyzing the figure 1.13 above is possible to notice that according the nature of the investments as well as the status of the first sub-ject, the Luxembourg feeder or holding entity of a pan-European regulated Real Estate investment structure, is often a SICAV, SICAF, FCP or a SICAR in which investors invest through equity. The profits received by the Feeder are not subject to corporate taxation in Luxembourg, moreover the outgoing dividend payments can be made without setting any withholding taxes in the Grand-Duché. Focus-ing on the Figure 1.13 we can denote that the financFocus-ing methods are developed through a dense and complex network which relates the Feeder and the Property Companies crossing the European Union. The main channels will be described below:
the debt financing is structured thanks to an isolated Luxembourg Finance Company ("FinCo"). The structure just mentioned would lend the funds received to the SPVs in conformity with the applicable thin capitalization rules for the Special Purpose Vehicles. The Finco’s interest payments are considered deductible expenses of the Financing Company, whereas the
in-terest payment to the Feeder can be made free of ant withholding taxed in Luxembourg. In addition, if a supplementary debt financing is required, this may be provided through third-party bank debt directly to the SPVs. the equity financing required to acquire Real Estate by a Luxembourg
com-pany or by a local special purpose vehicles (SPVs) will be provided through an intermediary "Société de Participations Financières" (SO.PAR.FI). The mentioned structure has been created in 1900 in the adoption process which Luxembourg faced in order to accept into law the EU Parent-Subsidiary Directive. A SOPARFI, is not a special type of company but, an ordinary commercial entity governed by common law. Moreover, it does not have any special tax regime, it is fully taxable. The most important thing to men-tion in this list is that, SOPARFI can, however, significantly reduce its tax burden by limiting its activity to holding investments and structuring these so that it can benefit from the rules in the EU Directive on the tax regime ap-plicable to Parent-Subsidiary companies. This regime notably allows, under well-defined conditions, a tax exemption on dividends paid by companies in which the parent company has a holding and on capital gains on the sale of its holdings.26
. Moreover, the SOPARFI is not regulated or supervised by the CSSF. The mentioned characteristics make the structure an interesting vehicle for managing holdings in a group of business. It is also the pre-ferred vehicle for financing and holding venture capital and private equity investments. Coming back to the Equity Financing method, the profits de-rived from the the Special purpose vehicles such as dividends and capital gains, are not taxable within the Luxembourg’s regime. Based on the local capitalization rules, equity financing will be provided by the master. This process permits to ensure the full deducibility of the interest payments in the country of the real estate investment. It means that the income derived from the R.E will only be taxable in the country where the real estate is located. For what concerns the dividends and the interest payments to the Master can benefit from la very low double tax treaty rates.27
26 Source:luxembourgforfinance
2
T H E L I T E R A T U R E R E V I E W
The literature review represents il milestone of this research we want to compose. It reproduces a detailed study illustrating the different aspects which will be cov-ered in the analysis will follow. Whichever fact-finding point will be exposed in the next pages and in particular on the quantitative analysis will depend on the studies and researches will be presented in this section. Moreover, the chapter will introduce a brief summary regarding the studies that have been conducted at first on the stocks performances analysis adopting the α model (Jensen1968) and then on the ones that used for the Reit evaluations.
2.1
literature contributes
As mentioned on the introduction of the chapter, the next lines will be dedicated on the quotation of the researches that has been conduced on the past which had the same approach on the evaluation of the funds.
ethical mutual fund performance is first model we will mention, it is a work that has been developed by (Bauer, Koedijk, and Otten 2005). They collect an international database which contains German, UK, and US mutual funds. After a controlling for investment style which presented no evidente of significant differences on risk-adjusted returns between ethical and con-ventional funds.1
On our purpose, the results that the research presented do not represent the key-factor but, what is really important is the fact that (in order to evaluate these funds) they adopted the α which is exactly the same approach we follow.
founder-ceos is another important contribution has been given by the research that has been conducted by (Fahlenbrach 2009). The authors expose the evaluation of the funds which are composed by securities which underlings are companies with CEO-Funder composition. They compare these
compa-1 The purpose of the research was investigate on the types of mutual funds and understand if the
"Ethical" funds has performed better than the others "Conventional" funds.
