Martin Paul and Richard Le Liard examine why the Channel Islands are the destination of choice for Asia and Middle East investors investing in real estate in London and Europe.
The Channel Islands (Jersey and Guernsey) have long been known as leading offshore centres for the establishment of investment funds and other investment structures. In particular, Channel Island vehicles are often used for alternative investment structuring - including private equity, infrastructure and real estate.
This article explains the trends in the Channel Islands real estate investment structuring industry with a particular focus on why the Channel Islands are the destination of choice for Asia and Middle East investors investing in real estate in London and Europe.
Shifts in Attitudes - Risk and Regulation
In the time since the 2008 financial crisis, the investment landscape has changed. A combination of low investment returns generally, and a return to relative economic stability, has encouraged greater risk appetite from investors, such that investors have increasingly sought to deploy capital to alternative investments.
However, the legal and regulatory landscape has also evolved since the crisis. Globally, there is greater focus on the regulation of financial services and there is generally an increased inclination among investors towards stability and consistency, and for some degree of appropriate regulation of investment structures, or their service providers, which is aligned to international standards.
These shifts in attitudes towards risk and regulation spell good news for the Channel Islands. Alternative investments is an area where the Channel Islands have always been very strong, and the Channel Islands enjoy international recognition of their standards of financial regulation and anti-money laundering measures, having been reviewed and assessed as meeting relevant standards by a number of international bodies - including the IMF, financial stability forum and Moneyval.
The net result has been increased activity and opportunities in the Channel Islands for those assisting with investment structuring - including in the real estate sector, enabling the Channel Islands to build, grow and prosper in what is an old industry, but with new rules.
The Real Estate Story
Real estate has been one of the mainstays of the Channel Islands' investment structuring industry for many years. The Channel Islands provide a stable, well regulated and tax neutral platform for investment in real estate, and accordingly provide a home for a variety of asset holding structures and funds - including some global real estate funds with assets running into billions.
The variety of structures in the Channel Islands reflects the variety of the real estate industry: single asset holding companies or trusts (JPUTs) sit alongside a variety of commingled investment structures, funds and listed property vehicles. The scope and extent of the regulation of those vehicles also varies, from lighter touch regulation of closely-held vehicles serving the needs of one or more institutional investors, to more 'retail' funds marketed to a broader pool of less-sophisticated investors.
The relative popularity of different types of real estate-focussed vehicles has changed somewhat in recent years. The model of an open-ended unlisted real estate fund has been questioned by some as a result of experience of the potential difficulties around illiquidity, and 'blind pool' funds have fallen out of favour. In contrast, there has been a significant increase in the demand for joint ventures, club deals and smaller investment syndicates. This seems to be driven, in part, by investors focussing on selecting the underlying investments, rather than on selecting investment managers, and also by investors wanting a degree more control over their investments. There has certainly been a growth in transactional activity over the past few years, as the 'corporate real estate' sector has grown.
The Channel Islands have earned a reputation as leading centres for real estate fund structuring, and particularly as a preferred destination for property investment into London and Europe. This has attracted investors from global markets and, increasingly, investors from Asia and the Middle East, who are seeking efficient means of deploying investment capital into real estate London and European Real Estate.
The changes made to the UK Real Estate Investment Trust (REIT) regime by the UK Finance Act 2012 have encouraged a number of new REITs to be formed. One of the key changes involved the introduction of the ‘institutional investor’ concept when determining whether or not the REIT is sufficiently widely held in order to enable it to meet the qualifying criteria of the regime. In practice, this means that it is possible for certain types of investor (such as sovereign wealth funds, pension funds, insurance companies, other REITs and large corporates) to form a joint venture or captive REIT to make a specific acquisition or to house a portfolio of assets. Channel Islands companies and the Channel Islands Securities Exchange (CISE) have been used to facilitate many of these new REIT structures, a number of which involve Asian and Middle Eastern investment capital.
A listing on the CISE is an attractive option for investors wishing to enjoy the benefits of REIT status, but not necessarily requiring liquidity or wishing to incur the costs associated with, for example, a London listing. Bedell Cristin has acted on a number of CISE REIT listings since the UK rule changes. Although a REIT must be UK tax resident, there is no restriction on the place of incorporation and Channel Island companies are being chosen as the REIT vehicle. One of the attractive features common to both Jersey and Guernsey companies is the flexible capital maintenance rules, particularly around the ability to pay dividends on satisfaction of a solvency test without reference to distributable profits.
The increasing use of the Channel Islands for the structuring of real estate deals is confirmed by our own recent experience where we have been involved in a number of matters involving the structuring and financing of real estate funds, joint ventures, and asset transactions. Recent examples include:
▪ the establishment and launch for a global insurer of a series of Jersey Expert Funds constituted as unit trusts, which invest in real estate and infrastructure assets;
▪ transactional activity involving single asset structures, including structures holding Drapers Gardens, Blackrock's headquarters in the City of London, the Gherkin and Tower 42 in the City of London, London's Battersea Power Station and the London headquarters of retailer Marks and Spencer;
▪ advising on the £472m acquisition of Ropemaker Place in the City of London, with the acquisition being made on behalf of a European and two Asian investors in a joint venture structured as a REIT established under the recently revised UK REIT rules; and
▪ advising on a series of Shariah-compliant funds and investment syndicates for Middle Eastern investors, investing several hundred £million in European real estate.
Foundations of Success
The Channel Islands remain, for many, the jurisdiction of choice for the establishment and administration of funds and other investment structures. There are numerous reasons for this, but include several key factors:
a proven track record as leading fund and financial services jurisdictions over many years;
robust but flexible regulatory regimes, which meet international standards;
a critical mass of world quality professionals;
tax transparency and tax efficiency; and
an ability to adapt and innovate, including enhancements to both law and regulation in order to meet required standards, and to provide choice.
Channel Islands' vehicles are widely used for cross-border investments in a broad range of jurisdictions is a real comfort to investors. We have seen that investors in growth markets have been using the Channel Islands because these investors are looking for jurisdictions with structuring expertise, respect for the rule of law, use of a common business language, time zone convenience and protection of property rights, all of which are provided by the Channel Islands.
Taking into account all of the above, whilst the environment (both investment and regulatory) has evolved significantly over recent years, it is perhaps not so surprising that the Channel Islands continue to be a destination of choice for those structuring cross-border investment.
The Channel Islands have adapted, and continue to adapt, to ensure that they remain safe and reliable conduits for funnelling capital from where it is held to where it is needed.
Through ongoing evolution, and a preparedness to respond to the demands of all interested stakeholders, the Channel Islands are well positioned to continue their success in the future and to remain a key player in both the funds and corporate real estate sectors.
Martin Paul, Head of Investment Funds and Private Equity group and Richard Le Liard, Senior Associate, Bedell Cristin