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Home > News > Asset Allocation > Europe ‘Destination of Choice’ for Real Estate
Investors
Asset AllocationNovember 7, 2014


EUROPE ‘DESTINATION OF CHOICE’ FOR REAL ESTATE INVESTORS

This year has seen the most money in seven years dedicated to private real
estate funds targeting Europe.
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The private real estate sector has experienced near-record levels of fundraising
for European funds in 2014 so far, according to Preqin.

The research firm reported that €21 billion ($26 billion) has been invested in
real estate funds focused on Europe, which is the highest level of fundraising
since 2007. Such funds now have a record €52 billion of cash ready to deploy, up
44% since December 2013.

During a period in which Europe’s economy is stuttering and the European Central
Bank is battling to restore inflation, appetite for the continent’s real estate
has exploded. Preqin reported that 44% of all capital raised globally for
private real estate funds was for Europe-focused products, compared with just
17% in 2013.

Andrew Moylan, head of real assets products at Preqin, noted “the return of many
of the largest US private equity firms” to Europe. Steve Schwarzman’s Blackstone
was the most successful, raising €5.1 billion for Blackstone Real Estate
Partners Europe IV in March, a record for a dedicated European private real
estate fund. Blackstone has since sought an extra €1.5 billion from existing
investors.

Another US firm, Lone Star Funds, raised €7.2 billion for its Lone Star Fund IX
in July, half of which is to be invested in Europe.

“Over half of the capital that has been raised this year has come from
non-Europe-based managers, with the likes of Blackstone Group, Lone Star Funds
and Starwood Capital Group all targeting European opportunities,” Moylan said.
“With many commentators highlighting the wealth of distressed opportunities
across the continent, this large amount of capital does have the potential of
driving up asset valuations and ensuring that deal-making is highly
competitive.”

Europe-focused funds also reached their fundraising targets quicker than North
American funds, Preqin said.

The private real estate sector faces issues, however: According to a separate
research paper from Preqin from October, there are fewer managers running larger
funds. Despite the strong appetite in Europe, globally it is taking managers
longer to raise money from investors, the company reported.

“Capital is likely to remain concentrated among larger, more experienced
managers, as many investors remain focused on firms with a proven strong track
record,” said Olivia Harmsworth, associate commercial manager for real assets at
Preqin.

“Standing out from the crowd is consequently still very difficult for managers,
meaning that those without a prior track record to demonstrate to investors will
need to be able to successfully articulate how they are best placed to find
value in the current market.”

Related Content:Where Are the Best Private Real Estate Funds? & Private Real
Estate: More Money, More Problems?


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Home > News > Regulation > Canada Pension Giant, Future Fund Implicated in Tax
Dodging Leak
Regulation November 7, 2014


CANADA PENSION GIANT, FUTURE FUND IMPLICATED IN TAX DODGING LEAK

The institutions’ use of Luxembourg-domiciled shell vehicles has made them the
target of tax-avoidance allegations.
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A federal Canadian pension and sovereign wealth funds for Australia and Abu
Dhabi were revealed in a major document leak to have set up networks of
Luxembourg-based vehicles for European investment deals.

These structures—arranged by PricewaterhouseCoopers (PwC)—have ignited a flurry
of accusations of tax dodging against Canada’s Public Sector Pension (PSP)
Investment Board and the Australian Future Fund.

Both funds are Crown corporations operated independently from their respective
governments and exempted from domestic taxation. However, domiciling investment
vehicles in Luxembourg often allows foreign entities to avoid European taxes.

Australia’s tax commissioner has called for an investigation into the
information leaked by the International Consortium of Investigative Journalists,
according to the Sydney Morning Herald. 

The Future Fund's head of communications told CIO the structures it uses are
"well tested" and standard across the industry. "We go to great lengths to
ensure that our approach to taxation is appropriate for a sovereign fund both in
terms of respecting all laws and regulations and as regards to protecting our
legitimate entitlements to sovereign immunity for tax purposes," the
spokesperson said.  

Politicians in Canada have called the revelations “deeply troubling,” but no
official action has commenced. PSP—one of Canada’s largest and least transparent
pension funds—manages roughly C$94 billion ($82 billion) for federal civil
servants, police, and members of the military.

In 2009, PwC submitted an outline of PSP’s plan for “Project Felicity”: A Berlin
real estate portfolio routed through layers of Luxembourg holding companies and
financed with loans from PSP. The document requests approval of the tax
structure from Marius Kohl, the head of Luxembourg’s corporate taxation agency.
Kohl is famous for his business-friendly approach, which has led to the nation
of 550,000 domiciling roughly 50,000 holding companies. 

 



 

“The income received by JP Residential entities”—five investment vehicles
containing 69 Berlin buildings—“qualify as income from immovable property
according to Article 4 of the Germany-Luxembourg tax treaty and will therefore
be exempted from corporate and municipal business tax in Luxembourg,” PwC wrote
to Kohl. “We respectfully request that you confirm the tax treatment of the
situation described above.”

Reached by CIO for comment, PSP maintained it has complied with all laws,
followed recognized business practices, paid all taxes legally required, worked
transparently with foreign authorities, and “received no tax advantages” in the
Berlin real estate deal.

A European corporate tax specialist briefly reviewed PSP’s statement, forwarded
by CIO, and felt it by-and-large accurate. “Absolutely nothing strikes me as not
in compliance with the rule of law,” he said, and described these sorts of
structures as “extremely common.”  

The only point on which the expert expressed skepticism was that PSP had no
tax-based incentive to invest via Luxembourg holding companies. “It could be
that the seller of this did receive tax advantages, and then passed on the
advantages to PSP,” he said. The pension fund “could have agreed to buy these
assets directly, which may have had tax consequences for the seller. And they
obviously chose not to do that.”

PSP argued that “it is widely recognized in our business that it is much easier
to sell a European corporation holding European assets than it is to sell a
Canadian corporation holding European assets… In that regard, using a Luxembourg
subsidiary gave PSP Investments greater flexibility in case of an eventual sale
of the whole portfolio of assets.”

However, as the tax expert pointed out, PSP could simply sell the assets
themselves as opposed to a multi-layered holding company that owns the
buildings.        

Still, he said, “if I were a stakeholder in PSP, I would want it to maximize its
post-tax returns according to the rule of law.” 

View the leaked documents at the International Consortium of Investigative
Journalists’ public database.  

Related Content: Senate Committee Condemns Hedge Fund Tax Practices; UK Union
Launches Attack on CPPIB, APG Over Tax

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 * MARYLAND STATE PENSION FUND RETURNS 3.14% IN FISCAL 2023


 * SHAREHOLDER PROPOSALS INCREASE, YET FEW GAIN A MAJORITY





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