The year 2000 marks to a large extent the starting point for real estate funds in Luxembourg. As the first alternative asset class to be substantially represented in the Luxembourg funds panorama, real estate funds have continued to expand since then and are still growing at an amazing speed.
Current status in figures
From an official point of view, the total amount of assets under management in Luxembourg real estate funds and real estate fund units currently amounts to slightly more than 40 billion euros. However, it is important to note that this figure only includes assets held by regulated funds, i.e. specialised investment funds and part II funds, and excludes for the time being assets held by unregulated vehicles and in particular limited partnerships, even if they are AIFMD compliant and have appointed an AIFM. In reality, the figure is therefore no doubt substantially higher and increasing rapidly. The assets under management in Luxembourg real estate funds have more than doubled over the past 5 years.
There are some obvious challenges which will have to be tackled over the next years
What has driven this tremendous growth? First and foremost, the growth of the development of the Luxembourg real estate fund industry is based on the development of real estate as an asset class in general, particularly after 2008. Indeed, real estate has traditionally been an asset class which performs better in relative terms than other asset classes in uncertain times, given that it provides in general a stable return over an extended period of time. The growth and, to some extent, industrialisation of alternative asset management in general has been another important driver behind the development of the industry in Luxembourg.
National political and regulatory drivers
In addition to these factors, Luxembourg has progressively increased its relative importance as a real estate fund center in comparison to other fund centers. The reasons for this are threefold. First, the legal infrastructure grants fund managers numerous options in terms of fund structuring. Up until 2013, most Luxembourg real estate funds were set up in the form of specialised investment funds (SIFs). SIFs are lightly regulated, flexible and tax neutral fund vehicles which are highly appreciated by investors and fund managers and have become a standard in the real estate world. Secondly, the Luxembourg tax framework and in particular the number of double taxation treaties concluded with countries within the European Union but also outside the EU have contributed to Luxembourg’s success. Last but certainly not least, Luxembourg’s stability has been and is still an important factor in the decision-making of fund managers.
Flexibility with appropriate new vehicles
In 2013, simultaneously with the implementation of the alternative investment fund managers directive (AIFMD), Luxembourg created a new extremely flexible and unregulated vehicle, the limited partnership, which has so far been a huge success with well in excess of 1,000 partnerships created in just three years. The reserved alternative investment fund, which is very similar to a SIF except that it does not require approval by the regulator, and which can benefit from the SIF tax regime and be used as a fund platform, represents the latest addition to the toolbox. In all likelihood, the existence of these vehicles will further contribute to the success of Luxembourg as a hub for real estate funds, given that the AIFMD, while stringently regulating alternative investment fund managers, gives complete freedom to the EU Member States in terms of the legal structuring of funds.
More opportunities to come
Is the future as bright as the past? Brexit, although neither desired nor sought after by Luxembourg, may represent a further opportunity to attract non-European and Anglo-Saxon fund managers in particular who are seeking a European passport. There are some obvious challenges which will have to be tackled over the next years, including among others the effectiveness of the Luxembourg regulator, the impact of BEPS on the structuring of real estate funds and more generally uncertain political and economic times with frequent regulatory changes. So far, the Luxembourg real estate industry has not only withstood all major challenges, in particular since 2008, but has even substantially increased its footprint in the real asset industry. Considering the latest additions and improvements to the Luxembourg product range, it is more than likely that the place of Luxembourg as a center for cross-border real estate will be further strengthened.