Luxembourg's estate of play

Cross-border marketing initiatives strengthen the country's reputation as a domicile for real estate and private equity funds

July 12, 2017

Luxembourg's position as a leading domicile for international funds looking to distribute across Europe is well-recognized.1 It benefits from its central location on the continent, a reputation for business-oriented regulatory and political institutions, and access to professional services in a well-developed market infrastructure.2

Key insights

  • Luxembourg's stable political environment and regulatory framework support the long-term investment horizons of real estate funds under AIFMD, as well as a range of other fund vehicles
  • Domiciliation in the Grand Duchy provides asset managers with access to a full range of legal, depositary and professional services to meet European Union distribution requirements
  • Luxembourg's regulatory supervisor, the CSSF, has established a reputation for being responsive to the needs of the financial community with a track record of support for pan-European real estate funds

In recent years, the Grand Duchy has successfully leveraged these advantages to develop a fund management ecosystem that supports new asset classes as European legislation codifies terms for their development – most notably, real estate and private equity.

Luxembourg's attraction as a place from which to serve the onshore market for real estate and private equity funds has grown since its transposition of the Alternative Investment Fund Managers Directive (AIFMD) in 2013.

AIFMD is the European Union (EU) framework governing the activities of hedge funds, private equity, real estate funds, and other alternative investment fund managers (AIFMs).3 Designed to reinforce the stability of the financial system by bringing transparency and security to funds that previously were not regulated within the EU, the regime requires all in-scope AIFMs to be authorized by their home regulators, and to provide specific disclosures as a condition of operation.

Asset managers are likely to prefer setting up operations where they can expect the most supportive environment for their pan-EU fund strategies

Compliance with AIFMD provides EU and non-EU-domiciled AIFMs with a cross-border passport to market and distribute funds in the EU. As with the regime applicable to UCITS funds, asset managers are likely to prefer setting up operations where they can expect the most supportive environment for their pan-EU fund strategies.4

Common regulatory treatments for fund products distributed across Europe introduces greater competition for business in Europe's single market.5

Structured for success

Luxembourg's stable political environment and regulatory structure are well-suited to the long-term investment horizons of real estate and private equity funds.6 Luxembourg provides local access to technology and market infrastructure as well as a full range of legal, depositary and professional services that allow the real estate sector to operate at a scale sufficient to meet their EU distribution requirements.7

Luxembourg's regulatory supervisor, the Commission de Surveillance du Secteur Financier (CSSF), has a long-standing reputation for being responsive to the needs of the financial community.8 Of particular relevance to AIFMD, the CSSF has both a commitment to and a track record of support for pan-European real estate investment funds, much of it originating from Luxembourg's successful efforts to launch real estate UCIs.

Luxembourg provides local access to technology and market infrastructure as well as a full range of legal, depositary and professional services

"Real estate is a very long-term asset class and it needs a very stable political and taxation environment to exist in, and I think Luxembourg is very successful in offering that," said Michael Hornsby, EMEIA Real Estate Funds Leader, EY Luxembourg. He also noted that Luxembourg's market infrastructure, access to professional services and the wide variety of investment structures address the broader needs of fund managers in their execution of strategies. "Overall, I think Luxembourg offers a very complete package for real estate investment vehicles."

Luxembourg offers a broad range of AIFMD-compliant fund structures, the most recent being the Reserved Alternative Investment Fund (RAIF). Introduced in July 2016, RAIFs offer the structuring flexibility of existing fund vehicles targeting institutional and professional investors, but are not subject to CSSF approval before they launch. Proponents of RAIFs argue that this advantage enhances time-to-market opportunities.9

In addition to RAIFs, Specialised Investment Funds (SIF) are available to aid investors seeking opportunities in the real estate funds space. SIFs are lightly regulated, operationally flexible and fiscally efficient multi-purpose investment funds designed for well-informed international, institutional and qualified investors, according to the Agency for the Development of the Financial Centre in Luxembourg.10

SICAR advantages

A real estate and private equity investment vehicle in Luxembourg may also be set up as a Société d'Investissement en Capital à Risque (SICAR), a structure designed primarily for private equity and venture capital. SICARs can offer certain advantages to these investors as SICARs do not have to follow investment diversification rules nor do they have lending or leverage restrictions.11

Another innovative structure for real estate and private equity investment is the option to set up a "securitization vehicle," which can take the form of either a public limited company, a joint stock company, a private limited company or a cooperative with limited liability.12 While these are regulated by the CSSF, securitization funds can also be established as unregulated investment entities managed by a management company.

To complete its range of real estate and private equity product offerings, Luxembourg also allows for an unregulated vehicle called the Société de Participations Financières (Soparfi) which applies to taxable resident companies.13 It is a fully taxable commercial entity that can benefit from 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.

The wide range of fund investment vehicles available in Luxembourg, coupled with its well-established and respected supervisory regime, ensure a high level of flexibility and support for fund managers based there. Whether it is establishing a Real Estate Investment Trust for pan-EU distribution or appointing a third party to run its global fund distribution strategy, Luxembourg is likely to further consolidate its status as a leading hub in the EU for real estate funds and other alternative investment vehicles.

Sources

  1. ALFI (February 17, 2017) Luxembourg reaches new record in assets under management
  2. Hedgeweek (December 20, 2011) Why Luxembourg will preserve its UCITs dominance
  3. European Commission (2011) Alternative Investment Fund Managers – Directive 2011/61/EU
  4. European Commission (2009) Undertakings for the Collective Investment in Transferable Securities - Directive 2009/65/EC
  5. Hedgeweek (October 23, 2010) Luxembourg's service providers focus on AIFM solutions
  6. Ernst & Young Why Luxembourg for Investment Funds?
  7. Ibid.
  8. ALFI (June 16, 2016) Luxembourg is the most popular international domicile in Europe for real estate funds today
  9. ALFI (October 11, 2016) Luxembourg Reserved Alternative Investment Fund
  10. Luxembourg for Finance Specialised Investment Funds
  11. Lawyers Luxembourg (March 2007) Why Think Luxembourg for a Private Equity/Venture Capital Entity?
  12. Luxembourg for Finance Securitization Vehicles
  13. Luxembourg for Finance Soparfi