ALFI survey shows ongoing increase in Luxembourg domiciled real estate investment funds

For the first time a new category of investment vehicle – the “Manager-Regulated AIF”[1] has been included in addition to direct real estate funds (Direct REIFs), Real Estate SICARs and Funds of REIFs. 

Denise Voss, Chairman of ALFI, said: “We have now been doing the survey on Real Estate Investment Funds since 2006 and over that time the market has changed considerably. Luxembourg’s aim is to create effective solutions for asset managers enabling them to distribute their funds globally and we believe that this latest edition of the survey confirms Luxembourg’s success in achieving that aim.”

Kai Braun, Partner and Alternatives Advisory Leader at EY, said: “The survey results clearly underline the positioning of Luxembourg as domicile of choice for real estate investment funds established with the aim to invest internationally and distribute cross-border. Since the introduction of the AIFMD, the trend of setting up international fund vehicles in the Grand Duchy has even increased with non-EU managers using Luxembourg as a European distribution hub.”

The total number of REIFs in the survey has increased by 10% since the last ALFI REIF survey in 2014 and, since  2006, the number of direct REIFs (excluding Manager-Regulated AIFs), have shown a compound annual growth rate (CAGR) of 16.45%.

EY findings of the survey include:            

• The number of new Luxembourg domiciled REIFs has increased:
  • 27 Direct Funds, including three Manager-Regulated AIFs were launched in 2014 compared to 18 Direct Funds, including two Manager-Regulated AIFs, in 2013 ;
  • Five funds of REIFs were launched in 2014 compared to only two during 2013 and one in 2012.
  • Early signs for Q1 and Q2 2015 are good with eight new SIFs, three Manager-Regulated AIFs and a single 2010 Part 2 Fund;
• The most common target sector remains ‘multi-sector’ with 61% (compared to 57% in the 2014 survey). Among the sectors themselves, the category of “retail” was the strongest preference with 45% of respondents indicating this as their sector of choice, compared to only 27% last year;
• Geographical investment strategies focus on a single country in 40% of the funds (stable from 2014 but up from 35% and 27% in the preceding two years), which supports the trend toward simplification.  70% of the surveyed Direct Funds invest only in Europe, whereas 8% of funds invest only in the Asia Pacific region and 3% invest only in the Americas;
• Investors come mainly from Europe.  However a significant portion comes from the Americas, Asia and the Middle East, confirming the global appeal of the Luxembourg fund regimes;
• Luxembourg domiciled Direct Funds and Funds of REIFs are mainly used for small groups of institutional investors, with 87% having less than 25 investors – an increase of 3 percentage points compared to the last ALFI REIF survey;
• Only 2% of the surveyed REIFs reported having more than 100 investors;
• The Direct Funds are widely distributed (but with focus on specific geographical areas), with only 26% limited to a single country, and 20% being sold in more than six countries. The largest proportion can be observed in the category of two to five countries, into which 54% of funds fall;
• Though umbrella funds remain popular for practical and cost reasons, the trend over the last few years has been towards simplification of structures and strategies, a trend which was again in evidence in the 2015 survey;
• Specialized Investment Funds (SIFs) account for all of the REIFs launched in the last 30 months (excluding Manager-Regulated AIFs) and the SIF regime is now firmly established as the favoured regime for regulated REIFs and Fund of REIFs in Luxembourg. SCS/SCSp partnership legal forms are an increasing trend since the updating of the Luxembourg Partnership laws in 2013;
• In line with previous surveys, smaller funds continue to make up the majority of direct REIFs, with 61% falling in the category of below EUR100 million net asset value (NAV);
• The number of funds with significant gearing has increased, with a greater proportion reporting a target gearing in the 50%-60% range and the over 70% range. This could indicate optimism in relation to the ability to borrow;
• The proportion of funds reporting under IFRS has decreased slightly from the previous year to 40% in 2015 compared to 42% in 2014. Funds launched in the first half of 2015 mostly report under IFRS (75%), whereas funds launched in 2014 were mostly reporting under Lux GAAP (68%).