The European Central Bank (ECB) has called for greater regulatory oversight of property funds after highlighting the liquidity risks these increasingly popular strategies pose.
The central bank said real estate investment funds (Reifs) had grown significantly in the past decade but remained exposed to significant liquidity risks, which could affect the stability of commercial real estate markets throughout Europe.
The ECB is now calling for policies to be amended to reflect Reifs’ vulnerabilities, meaning potentially more regulation to be introduced at a national level.
In its recommendations, the ECB added: "Although Reifs are regulated under the AIFMD [Alternative Investment Fund Managers Directive], they may be subject to a range of national requirements which can go beyond the minimum standards for alternative investment funds.
“This means that the regulatory framework for Reifs may vary across jurisdictions. Since many Reifs have both cross-border exposures and a cross-border investor base, there is a need to ensure that the regulations governing Reifs are consistent across the euro area.”
In its research, the ECB found the net asset value of Reifs in Europe had grown from under €400 billion in 2012 to over €1 trillion.
To protect markets against the vulnerabilities of these funds, the ECB is putting the focus on policymakers and stated that although asset managers should have liquidity management tools (LMTs) in place, more needs to be done.
The role of fund structures has become a subject of scrutiny, with open-ended funds being considered as not appropriate for illiquid assets such as real estate.
In the UK, due to several large property funds being gated during times of market stress in recent years, this led to the Financial Conduct Authority (FCA) unveiling a new fund structure as a result – the Long-term Asset Fund, or Ltaf.
In light of structural debates, the ECB is also calling for regulators to provide more guidance around these and added that certain countries do not allow open-ended real estate funds "given the illiquidity of their portfolios".
The FCA added: "If an open-ended fund structure is preferred, policy measures that address the structural liquidity mismatch should be implemented. Given the cross-border nature of these funds, it would be important to ensure that these measures were applied in the same way by all supervisors in the EU.”
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