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By Nick Reeve | Published Sep 03, 2012

EU directive ‘may raise costs for property funds’

A major piece of European regulation could lead to spiralling costs for ‘bricks and mortar’ property funds, according to trade bodies.

Both the IMA, the fund management trade body, and the Association of Real Estate Funds (Aref) have warned that the Alternative Investment Fund Managers directive (AIFMD), which is expected to come into force next summer, will raise costs for mainstream direct property funds.

The AIFMD was drafted immediately following the banking collapses of 2008, and was aimed at bringing European hedge funds and private equity funds under a regulatory umbrella for the first time.

But the current wording of the directive also includes retail property funds and investment trusts, as well as other products.

Aref secretary general Mark Sherwin said one of the main issues that could pose challenges to property funds was the need to delegate parts of a fund’s function to third parties.

Direct property funds use more third parties than other types of retail funds. The current AIFMD rules do not take this into account and are vague regarding the legal definition of the fund manager, potentially causing operational difficulties for property funds.

In addition, Mr Sherwin said rules on depositaries may raise costs for property managers. Depositaries act as the custodians for most assets held in funds, keeping them separate from the fund manager. However, physical property assets are held directly by the fund, with depositaries holding only cash reserves and any equity holdings – typically a smaller part of a fund’s portfolio.

“Real estate can’t be held in custody like shares, so there is a different burden on depositaries,” Mr Sherwin said.

“There is a reduction in the depositary role for property funds, but they still have to provide the full depositary function at the full cost.”

Moreover, the new depositary rules are not confined to property funds. In July the EU published details of its Ucits V proposals, which applied AIFMD’s depositary rules to Ucits funds. Experts warned the cost of investing in emerging markets could be forced up by the rules, adding 0.05-0.1 percentage points to a fund’s ongoing charges.

Julie Patterson, director of funds at the IMA, said the directive was “messy” and questioned how the FSA would deal with an increase in data reporting.

“There will be volumes and volumes of reporting to both investors and the regulator – effectively 19 pages per fund every quarter,” Ms Patterson said. “National regulators will be swamped with data. There will be very significant initial and ongoing costs [for providers] connected to these volumes of data.”

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