An Update On Luxembourg Regulated Real Estate Investment Funds

1. Some facts and figures

   With 2,208,198 billion euros of net assets under management in Luxembourg investment funds at the close of February 2011, Luxembourg is the single largest investment fund centre in the European Union, and second in the world after the United States. In July 2010 the NAV of regulated Luxembourg real estate investment vehicles amounted to about EUR 20 billion, divided over 171 funds (including sub-funds of umbrella structures).1 Whilst most funds were launched by US, UK, German and French managers, 8% of the new real estate funds launched in 2009 had Benelux initiators. In 2008 that figure was 15%. Although the number of non-EU managers launching a Luxembourg-based fund is significant, the geographical investment strategy of the vast majority of these funds focuses on Europe (75% of them invest in EU countries).

   The vote by the European Parliament on 11 November 2010 to approve the EU Directive on Alternative Investment Fund Managers ("AIFM Directive") appears set to boost the position of Luxembourg as a domicile of choice for alternative investments, which includes real estate assets. The AIFM Directive aims at regulating the managers of alternative investment funds ("AIFMs") and only to a lesser extent the alternative investment funds ("AIFs") themselves. However, the Directive also imposes a number of requirements which will apply at the level of the AIF, such as with respect to the depositary, the valuation agent, the publication of an annual report, the provision of information to investors by means of an offering memorandum or otherwise and the reporting to regulators.

   This article outlines the current Luxembourg environment in which regulated Luxembourg real estate vehicles operate. It can be inferred from this outline that these vehicles are already to a large extent AIFM compliant.

2. Forms of Luxembourg regulated funds

   Even though a fair number of unregulated Luxembourg real estate investment vehicles exist and are widely used, in particular for smaller investments and club deals, the market trend is clearly towards regulation. The AIFM Directive will contribute to that trend, in that will cause a large number of investment fund managers and funds to become subject to regulation.

   Regulated Luxembourg real estate vehicles can take any of the following four forms:

   Public undertakings for collective investment (UCIs), which can raise funds from the public; Specialised investment funds (SIFs), which are UCIs that are not intended to be placed with the public; Risk capital Investment companies (SICARs), which are not intended to be placed with the public; or, Regulated securitisation vehicles, which raise funds from the public. Real estate funds structured as securitisation vehicles are rather exceptional and will not be discussed further. The salient features of the three other fund forms are outlined below.

   2.1. Common features

   All three types of funds are subject to authorisation...