EPRA response to the European Commission Green Paper on long-term financing of the European economy

Transcription

1 Interest Representative Register ID number: EPRA response to the European Commission Green Paper on long-term financing of the European economy June 24, 2013 For any enquiries related to this report please contact: Gareth Lewis Director: Policy, Capital Markets, Reporting & Regulation T +32 (0) M +32 (0) gareth.lewis@epra.com Square de Meeus 23, B1000 Brussels Belgium T +32 (0) F +32 (0)

2 Contents 1. Introduction Executive Summary Responses to specific questions in the Green Paper Real Estate and the Commercial Property Sector The commercial property sector Institutional investors and commercial real estate Real estate in the real economy Towards an efficient commercial property sector Underdeveloped European listed property sector Building a Stronger Europe The role of REITs and stock-exchange listed property companies Real Estate Investment Trusts (REITs) Recommendations: Enhancing the Role of Property in Long-Term Financing of the EU Economy European-wide REIT implementation Mutual Recognition of EU REIT regimes Solvency II approach - real estate and infrastructure Best practice approach to Defined Contribution fund design Improvements to the European equity raising environment Misclassification of long-term property operating businesses as funds under the AIFMD Appendix 1 - Proposals for Mutual Recognition of REIT regimes Appendix 2 - Equity capital raising and the European REIT sector... 38

3 Section 1: Introduction 1. Introduction 1.1. EPRA is the representative organisation for commercial property companies that are quoted on the public stock exchanges of Europe and other exchanges around the world. Our members are directly engaged in the financing, development, long-term ownership, operation and management of commercial and residential property (in all its forms), in Europe and globally. Between them our 200 members own, manage and operate over 250bn of commercial and residential real estate. Our membership also includes the institutional investors such as pension funds and insurance companies that invest in, or have an interest in investing in real estate indirectly via these listed property companies Real estate in this context encompasses a very broad range of properties; from offices, housing, retail and industrial facilities, to social, community and business infrastructure such as data centres, health and social care facilities, schools, leisure facilities, cinemas and restaurants. Real estate assets divide between those owner-occupied and those leased. The latter are often referred to as commercial real estate. We estimate the value of EU commercial real estate to be 285 billion in the provision of 3.5 billion square meters of properties for use by companies, public authorities, citizens and non -profit organisations The value of real estate assets located in the European Union and owned by companies listed on a regulated stock market represents just 2% of the total European real estate. But these companies have proven to be the most active and most efficient owners of commercial real estate when it comes to quality, renewal and environmental management in urban contexts During the recent financial crisis, listed real estate companies have also proven their resilience to the systemic risks which have affected a number of property markets. They have rapidly recognised valuation losses, accessed the equity, bond and bank loan markets without disruption, and adjusted their Loan-to-Value faster than non-listed real estate funds and banks. With equity standing at typically 45 to 65 % of total assets and medium to longterm loans for the remainder, they have a maturity transformation role that is not unlike that of banks but with a much stronger equity base. Hence listed property companies adequately fit the profile for the long-term financing of the European Union s built infrastructure EPRA represents a unique business sector that is directly responsible for the full spectrum of integrated activities that are critical to successfully marry the needs of the capital markets with the long-term accommodation and infrastructure needs of Europe s citizens and businesses. The successful financing, design, delivery and long-term management of the built environment provides the platform for all economic activity and growth, as well as social and community cohesion. EPRA also represent the major investors into that business activity. As such, we believe we are well placed to provide a useful and relevant perspective and are very grateful for the opportunity to comment on the European Commission Green Paper on Long- Term Financing of the European Economy. 3

4 Section 2: - Executive Summary 2. Executive Summary 2.1. We welcome the European Commission Green Paper on long-term financing of the European economy. The real estate sector in all its forms plays a critical role in providing a platform for the economy and meeting the accommodation needs of Europe s citizens and businesses. Accordingly, we believe that the provision of long-term capital to that business sector should be a key focus of the Green Paper. We have some concerns that commercial real estate, as a well-established, long-term asset class particularly suited to the needs of institutional investors, has not received more prominent consideration A number of identifiable regulatory and market barriers exist which prevent the European property sector (including the financing of this sector) from delivering its full potential. In our response EPRA have identified a number of market inefficiencies and solutions that would enhance the ability of the sector to deliver the objectives outlined in the Green Paper. We have answered the specific questions in the Green Paper at Section 3 and referenced more detailed analysis where this is included elsewhere in our response EPRA s view is that a clear, sub-optimal aspect of the existing EU real estate sector, in the context of the objectives of the Green Paper, is the relatively low level of European real estate and infrastructure that is developed, owned and operated within the realms of the publicly quoted stock markets. This reduces both the accessibility of the asset to investors and the quality of the built environment. We believe that the European Commission should pursue the following positive steps to promote a more efficient commercial property market:- i. Develop an EU Communication to promote the emergence of REIT 1 regimes across European member states (currently only 8 of the 27 member states have a recognisable REIT regime). ii. iii. iv. Develop an EU Communication to initiate debate and shared best practices with regard to optimal design of REITs to secure global capital inflows into Europe s commercial property/infrastructure businesses and a deliver a more stable, transparent and higher quality built environment. Develop an EU Communication that invites Member States to address significant market barriers to cross-border investment into and by REITs in Europe and globally through a process of Mutual Recognition. Review the proposed Solvency II treatment of real estate and other long-term physical assets to 1) develop a more sophisticated approach to real estate and infrastructure and 2) 1 'REIT' is a term that historically refers to a 'Real Estate Investment Trust' - a property vehicle that has a special 'flow-though' tax status. However, it is now a brand that has come to be used in the market to describe listed property companies more generally (rather than Trusts ) including those that do have a special tax status. REITs are explained in more detail in Section

5 Section 2: - Executive Summary ensure an application of the Solvency II regime that allows long-term investors to treat their holdings in property rich equities (REITs and other listed property investment companies) as real estate under the standard formula. v. Ensure that, where appropriate, REITs and property companies are not misclassified as funds and financial businesses under the AIFMD and EMIR regulation respectively, but are prima facie recognised as fully integrated, commercial operating businesses. vi. vii. Develop a European-wide approach to promote the development of best practice with regard to Defined Contribution pension fund design which builds on the experience of more developed DC markets like the US and Australia. Principally, the inclusion of real estate as a default asset class and the use of listed property companies and REITs as a liquid form of real estate exposure. Engage with the relevant market participants and regulators to review the current framework of regulation and practices that exist in Europe with regard to equity raising for the listed property sector including REITs. This could consider waiving or shortening the procedure for the exercise of pre-emptive rights of shareholders when a property company raises additional capital not exceeding [10] % of its existing capital The underdeveloped nature of the European listed property sector represents a significant, identifiable, and smart /market driven opportunity for the EU and national governments to pursue policies to expand the amount of property and infrastructure managed within the publicly quoted markets and meet the objectives outlined in the Green Paper. 5

6 Section 3: - EPRA Response to specific questions in the Green Paper 3. Responses to specific questions in the Green Paper Q1. Do you agree with the analysis [set] out above regarding the supply and characteristics of long-term financing? Ref: We support the Commission s view about the importance of promoting long-term financing of the European economy and we endorse the idea that long-lived capital goods such as infrastructure, buildings and R&D, education and innovation display countercyclical characteristics as opposed to shorter-lived capital goods, which are strongly pro-cyclical. We would like to further highlight the importance of commercial real estate in this context as a productive, resilient and enabling asset class which enhances the built environment, enables economic activity, provides diversification and offers a wide range of risk-return combinations which suit different risk profiles for investors. We welcome the Green Paper s references, in the list of long-lived capital tangible assets, to housing on page 2 and buildings on page 5. We strongly disagree with the suggestion (at page 10) that institutional investors average exposure to infrastructure assets suffer as a result of their exposure to real estate. This is not a zero-sum game: investment in real estate and infrastructure can be entirely complementary and regulators should encourage long-term investment in both. Q2. Do you have a view on the most appropriate definition of long-term financing? Ref: We agree with the Green Paper s broader definition of long-term financing, as opposed to the narrower G20 definition, provided that real estate sector in all its forms (including direct and indirect) is recognised as an essential and natural part of the economy for long-term investment. We believe that the real estate sector in all its forms, and the provision of long-term capital to that business sector, should be a key focus for practical and smart solutions emerging from the EC Green Paper. We have concerns that commercial real estate, as a wellestablished long-term asset class for institutional investors has not received more prominent consideration. Section 4 We would identify the economically enabling quality of underlying investment as a potentially useful marker for the type of long-term investment that regulators might seek to promote. The promotion of long-term financing should not create a bias away from those forms of holding the underlying investment (such as listed property companies) that offer investors liquidity and complete flexibility over their period of ownership. 6

7 Section 3: - EPRA Response to specific questions in the Green Paper Q3. Given the evolving nature of the banking sector, going forward, what role do you see for banks in the channelling of financing to long-term investments? Ref: We strongly support the idea of a more diversified financial system, and we welcome a transition from a bank-dominated financial system to a playing field that allows more space for institutional investors, thriving capital markets and specialist debt funds. We would highlight the beneficial attributes of the listed property sector in utilising the full spectrum of debt and equity financing into long-term assets, as an important part of the solution. Listed property companies have proven to be a stabilising influence on the property market particularly during the financial crisis by providing much needed liquidity to institutional investors wishing to manage their real estate exposure, as well as being able to utilize different sources of financial capital not available to other real estate operators. However, we are also aware that, in the current process of bank deleveraging, too much haste to reduce the important role of banks could cause lasting damage to capital-intensive, long-term investment sectors like real estate and infrastructure. In particular, indirectly hitting bank funding before alternative providers have fully emerged to fill the gaps could make the current situation worse for already capital-starved businesses, including SMEs with fragmented access to finance. It should also be noted that banks can be naturally better suited to certain types of financing. For example, while institutions may like the stable long-term income from commercial real estate or infrastructure, banks may often be the most suitable sources of finance during the initial planning and construction phase of a project, when there is development risk and hence more uncertainty about the future cash flows likely to be generated. Q5. Are there other public policy tools and frameworks that can support the financing of long-term investment? EPRA s view is that a clear, sub-optimal aspect of the existing EU real estate market in the context of financing long-term investment is the relatively low level of European real estate and infrastructure that is developed, owned and operated within the realms of the publicly quoted stock markets. This reduces the accessibility of the asset to institutional investors (particularly the medium and smaller pension funds) and retail investors. It constrains the, transparency and stability of the market and the quality of the built environment. We believe that the European Commission should pursue the following positive steps to promote a more efficient commercial property market:- 1. Develop an EU Communication to promote the emergence of REIT regimes across European member states (currently only 8 of the 27 member states have a recognisable REIT regime). 2. Develop an EU Communication to initiate debate and shared best practices with regard to optimal design of REITs to secure global capital inflows into Europe s commercial property/infrastructure businesses and a deliver a more stable, transparent and higher Ref: Section 4.19 Section 6 7

8 Section 3: - EPRA Response to specific questions in the Green Paper quality built environment. 3. Develop an EU Communication that invites Member States to address significant market barriers to cross-border investment into and by REITs in Europe s and globally through a process of Mutual Recognition. 4. Review the proposed Solvency II treatment of real estate and other long-term physical assets to 1) develop a more sophisticated approach to real estate and infrastructure and 2) ensure an application of the Solvency II regime that allows long-term investors to treat their holdings in property rich equities (REITs and other listed property investment companies) as real estate under the standard formula. 5. Ensure that, where appropriate, REITs and property companies are not misclassified as funds and financial businesses under the AIFMD and EMIR regulation respectively, but are prima facie recognised as fully integrated, commercial operating businesses. 6. Develop a European-wide approach to promote the development of best practice with regard to Defined Contribution pension fund design which builds on the experience of more developed DC markets like the US and Australia. Principally, the inclusion of real estate as a default asset class and the use of listed property companies and REITs as a liquid form of real estate exposure. 7. Engage with the relevant market participants and regulators to review the current framework of regulation and practices that exist in Europe with regard to equity raising for the listed property sector including REITs. This could consider waiving or shortening the procedure for the exercise pre-emptive rights of shareholders when a property company raises additional capital not exceeding [10] % of its existing capital. The underdeveloped nature of the EU listed property sector represents a significant, identifiable, and smart /market driven opportunity for the EU and national governments to pursue policies to expand the amount of property and infrastructure with the publicly quoted markets and improve the environment for financing long-term investment. Q6. To what extent and how can institutional investors play a greater role in the changing landscape of long-term financing? Ref: We agree with the Green Paper that institutional investors should be encouraged to play a larger role in the provision of finance, and that new regulation such as Solvency II must be managed carefully to avoid adding to the constraints on them. We draw attention to the important role that listed real estate companies (including REITs) have played for institutional investors all over the world in providing an accessible and liquid exposure to real estate returns. Well-developed listed property markets clearly go hand in hand with sophisticated institutional investment markets and this will be an increasingly important consideration as Europe moves into a Defined Contribution environment. In regions with more developed Defined Contribution environments, REITs have played a very important role alongside direct investment and other forms of indirect investment, in providing institutional investors with exposure to real estate. The institutional investors and consultants in these markets have a more sophisticated understanding of the use of REITs as Section

9 Section 3: - EPRA Response to specific questions in the Green Paper an efficient and accessible form of investment into real estate and infrastructure that is less developed in Europe (see also answer to Questions 7 below). A major concern for Europe is that the European listed property sector is small relative to other global markets which put it at an immediate disadvantage to other global regions in efficiently channelling long-term institutional investment into the built environment and infrastructure. Section 4.19 Q7. How can prudential objectives and the desire to support long-term financing best be balanced in the design and implementation of the respective prudential rules for insurers, reinsurers and pension funds, such as IORPs? Ref: We are concerned that these prudential regimes like those applicable to banks are being designed with inadequate input from those with a deep understanding of long-term asset classes like real estate. The result is rules which have unintended consequences and may not even achieve their objectives. We understand the importance of prudential regulation to safeguard the financial system, but we also fear that an excessive focus on short-term liquidity for long-term assets could be detrimental and prevent viable projects from being undertaken. A model based on an excessive preoccupation with short-term liquidity would not fit real estate, which is an asset class where patience and long-term horizons are essential. The current capital requirements imposed by Solvency II overstate the risks of real estate investment by focussing on shortterm liquidity and as a result create a disincentive for long-term investment. Current regulations are too often strongly pro-cyclical and exacerbate the issue of the lack of financing available to businesses. Section 6.1 In the current process of the revision of the IORP Directive, the capital requirements for real estate investments should be in accordance with the risk profiles thereof, and regulations excessively focusing on short term security should be avoided. As stated in our response to Question 6 above, well-developed and sophisticated institutional investor markets go hand-in-hand with developed commercial listed property sectors. Europe has a small listed property sector and the objective of regulators should be to reverse this cycle. Taking steps to improve the size and accessibility of the EU listed property sector, through the promotion of REITs. Section 4.6 As stated in our answer to Question 5, Any prudential regime for insurers and pension funds should specifically support an approach that allows long-term investors to treat their holdings in property rich equities (REITs and listed property investment companies) as real estate under the standard formula. 9

10 Section 3: - EPRA Response to specific questions in the Green Paper Q8. What are the barriers to creating pooled investment vehicles? Could platforms be developed at the EU level? On the one hand, publicly quoted corporate operating businesses like property companies and REITs can clearly be viewed as a form of pooled investment just like any other listed company (because they allow smaller investors to invest in businesses alongside larger institutional investors). On the other hand, the term pooled investment tends to be used to describe investment vehicles that are established and exist with the main objective of diversifying risk for investors by pooling capital and investing that capital. In this sense, companies that are quoted on the public stock exchange such as Volkswagen PLC and Tesco PLC, are not generally thought of as pooled investment vehicles and the same should be true for listed property companies and REITs. Ref: Section 6.22 Real estate can be a confusing business sector and this fact has been apparent from ongoing uncertainty surrounding the scope application of the AIFMD to the many different types of real estate businesses. Recent experience for real estate with the EU s AIFMD shows that the uses of terms like pooled investment and collective investment tend to be associated with fund activity. This has led to, at best; a high level of uncertainty for real estate companies with regards to the scope of new EU legislation and at worst, could lead to an inappropriate misclassification of large parts of an important productive business sector as funds/financial businesses. We believe that a much better understanding of the real estate and infrastructure sector is required by policy makers, in order to develop appropriate solutions in the context of the different methods/ forms through which this sector is financed. Real estate is often misunderstood as a business sector and this fact has been apparent from ongoing uncertainty surrounding the scope application of the AIFMD to the many different types of real estate businesses. Real estate is unique in that it is both seen as an asset class in its own right (comparable alongside bonds, equities, debt etc) as well as clearly being an important productive business sector itself, responsible for providing accommodation services to businesses and individuals. Because of its attraction as an asset class, many different forms of vehicle exist through which investors gain exposure to that asset class. These structures and business models range from passive asset managers through to fully-integrated, internally managed property companies that engage in the full range of business activities that long-term investment in property requires (re)development, acquisition, management and leasing primarily with a view to maximising rental income returns for shareholders. The fact that listed property investment companies bring together these activities undertaking active, productive delivery of a product (the built environment) whilst at the same time providing a specific diversifying source of real estate backed income to investors, should be seen a very positive and unique aspect in the context of the Green Paper. Instead, as a consequence of a very poor understanding of the characteristics of the real estate sector and its different participants, REITs and listed property companies are still at risk of being 10

11 Section 3: - EPRA Response to specific questions in the Green Paper misclassified as funds. Q9. What other options and instruments could be considered to enhance the capacity of banks and institutional investors to channel long-term finance? Ref: The European Commission should promote a greater role for institutional investors and indeed private funds as providers of long-term finance but make sure, at the same time, that the overall amount of funding available to the economy is not reduced. Prudential regulation needs to understand that commercial real estate is a vital factor of production and economic enabler and not merely a risk for the banking system; and investor protection considerations should not lead regulators to impose inappropriate short-term liquidity requirements on fundamentally long-term income producing and illiquid assets such as (direct and indirect) real estate. It is also very important that the cumulative effects of regulation (affecting vehicles and fund managers directly and every other aspect of the supply chain, including different kinds of capital providers, financial instruments and derivatives, credit rating agencies and so on) are properly understood. Q10. Are there any cumulative impacts of current and planned prudential reforms on the level and cyclicality of aggregate long-term investment and how significant are they? How could any impact be best addressed? Ref: We believe that the AIMFD, Solvency II, IORP, Basel III have cumulative effects on the supply and cost of capital for long-term investment. Most importantly, because each of these regulations affects a different part of the supply chain of investment, they (and the continuing uncertainty surrounding possible further regulation of shadow banking ) are discouraging alternative providers from emerging and filling the gaps left by deleveraging banks. As an example of the potentially cumulative and unintended consequences of legislation, the AIFMD, defines (for the first time) funds (AIFs) in the context of the activity of fund management. An AIF must be a collective investment undertaking - an undefined and extremely broad concept that potentially could, in theory, include all listed companies. Any business deemed to be an AIF is automatically within the scope of EMIR (regulation of OTC Derivatives) and classified as a financial counterparty with the implication that any swap transactions (for example, regular interest rate hedges used to reduce exposure to floating rate property loans) are treated differently to non-financial businesses. These businesses deemed to be financial counterparties engaging in commercial hedging transactions will be required to post cash collateral against the principal and on variation margins either increasing the cost of finance or most likely eliminating the hedging transaction as a viable option. Section 6.22 It is surely wrong that defining a business as a fund will automatically mean that exactly the same transaction (hedging exposure to interest rate fluctuations) will be treated differently to a business that is not a fund. This inappropriate mechanism for classifying businesses 11

12 Section 3: - EPRA Response to specific questions in the Green Paper appears to be a particular problem for the real estate sector because it is a sector the overlaps the fund management sector as discussed in our response to Question 8. Q11. How could capital market financing of long-term investment be improved in Europe? Ref: See response to Question 12 below Q12. How can capital markets help fill the equity gaps in Europe? What should change in the way market-based intermediation operates to ensure that the financing can better flow to long-term investment, better support the financing of long-term investment in economically, socially and environmentally sustainable growth and ensuring adequate protection for investors and consumers? The Commission should positively support the growth of the European listed real estate sector. Listed real estate companies, with their good access to capital, represent a well regulated, liquid, income-driven long-term investment proposition for all types of investor diversifying beyond mainstream equities and fixed income instruments. They have delivered a disproportionate share of capital investment in the built environment during the last five years in particular. Ref: Section 6 We believe that, the European Commission should pursue the following positive steps to promote a more efficient commercial property market:- 1. Develop an EU Communication to promote the emergence of REIT regimes across European member states (currently only 8 of the 27 member states have a recognisable REIT regime). 2. Develop an EU Communication to initiate debate and shared best practices with regard to optimal design of REITs to secure global capital inflows into Europe s commercial property/infrastructure businesses and a deliver a more stable, transparent and higher quality built environment. 3. Develop an EU Communication that invites Member States to address significant market barriers to cross-border investment into and by REITs in Europe s and globally through a process of Mutual Recognition. 4. Review the proposed Solvency II treatment of real estate and other long-term physical assets to 1) develop a more sophisticated approach to real estate and infrastructure and 2) ensure an application of the Solvency II regime that allows long-term investors to treat their holdings in property rich equities (REITs and other listed property investment companies) as real estate under the standard formula. 5. Ensure that, where appropriate, REITs and property companies are not misclassified as funds and financial businesses under the AIFMD and EMIR regulation respectively, but are prima facie recognised as fully integrated, commercial operating businesses. 6. Develop a European-wide approach to promote the development of best practice with 12

13 Section 3: - EPRA Response to specific questions in the Green Paper regard to Defined Contribution pension fund design which builds on the experience of more developed DC markets like the US and Australia. Principally, the inclusion of real estate as a default asset class and the use of listed property companies and REITs as a liquid form of real estate exposure. 7. Engage with the relevant market participants and regulators to review the current framework of regulation and practices that exist in Europe with regard to equity raising for the listed property sector including REITs. This could consider waiving or shortening the procedure for the exercise pre-emptive rights of shareholders when a property company raises additional capital not exceeding [10] % of its existing capital. The underdeveloped nature of the EU listed property sector represents a significant, identifiable, and smart /market driven opportunity for the EU and national governments to pursue policies to expand the amount of property and infrastructure with the publicly quoted markets and meet the objectives outlined in the Green Paper. Section 4.19 Q16. What types of CIT reforms could improve investment conditions by removing distortions between debt and equity? The development of and use of REITs to increase capital flows into real estate has, in itself, been used as a policy tool by Governments to remove the distortion towards debt financing in the capital intensive real estate market. REITs, with their tax exemption for real estate income (where the tax burden is largely shifted to the investor level), have the effect of levelling the playing field between equity investors into corporate vehicles and those larger investors that have sufficient scale to invest directly (and who often rely heavily on debt to fund their real estate investments). Furthermore, listed REITs themselves are lowly geared businesses both due to the imposed discipline of the public markets and specific requirements in REIT legislation which restrict the amount of debt finance. The widespread introduction of listed REIT legislation across Europe would therefore contribute to removing the distortion in the current market and at the same time creating a regular, stable source of tax revenue for government through the collection of withholding tax receipts on dividends. Ref: Section 5.8 Q17. What considerations should be taken into account for setting the right incentives at national level for long-term savings? In particular, how should tax incentives be used to encourage long-term saving in a balanced way? Ref: 13

14 Section 3: - EPRA Response to specific questions in the Green Paper REITs are a good example of a vehicle channelling savings into a long-term investment asset class such as real estate. They are, broadly speaking, tax transparent, so investors effectively receive income (most of which must be distributed annually) as if they were directly investing in the property market, and tax is collected upon distribution of that income. They are available to ordinary investors for whom directly investing in commercial real estate (in particular) may be impossible; they are listed and therefore liquid, subject to high and transparent standards of governance, and they provide portfolio diversification. Importantly, the fact that tax is largely within the REIT means that it has no tax incentive to prefer debt to equity. REITs do have lower levels of gearing than real estate investment businesses more generally. The Commission should positively promote the REIT concept, as already adopted by a number of member states. Section 5.8 Q18. Which types of corporate tax incentives are beneficial? What measures could be used to deal with the risks of arbitrage when exemptions/incentives are granted for specific activities? Ref: See responses to Q16 and Q17. We would add that tax depreciation for long-term investment is an important incentive for reducing the cost of investment that is particularly valuable to European societies and the economy. This is relevant for the built environment as well as for research and development. Q19. Would deeper tax coordination in the EU support the financing of long-term investment? Ref: Although we have some reservations regarding deeper tax coordination at the EU level, we do believe there is a very important role that the European Commission could play in driving best practice approaches, which take into account the particular economic and financial characteristics, policy priorities and existing tax system of each member state. In particular:- EPRA suggests that the European Commission issues a Communication inviting the Member States to i. create a REIT regime if they have not done so before, ii. adopt the Mutual Recognition procedure and iii. adjust their REIT regimes so that they converge to a common best practice model. Section 6 Appendix I EPRA would welcome the possibility to enter into a dialogue with the European Commission aiming at defining the characteristics of this best practice REIT regime. Given the discussions at the level of the European Commission with the EU Member States regarding the introduction of a European REIT structure and considering the different viewpoints of the Member States on this issue, the conclusion can be drawn that at least for the time being there is no real appetite or drive among EU Member States to agree on an European-wide REIT. In fact, many Member States would actively oppose such an initiative at 14

15 Section 3: - EPRA Response to specific questions in the Green Paper this relatively early stage in the development of the REIT regimes in Europe. However, EPRA s view is that within the existing and emerging REIT regimes, there is both the need and the scope for facilitating cross-border investment through REITs. EPRA s principal recommendation is that EU Member States adopt an approach involving the Mutual Recognition of national REIT regimes in Europe. Under this approach, EU Member States can enter into reciprocal arrangements supported by the EC and bilateral tax treaty provisions, to collect taxation revenues and allocate them between the situs countries. EPRA considers that the best way to promote resolution of the REIT related European tax issues would be for the European Commission to issue a Communication on the subject inviting the Member States to adopt the Mutual Recognition procedure. This Communication would become effective between those Member States which have REIT legislation in their domestic system. The Communication might also invite Member States without a domestic REIT regime to recognize the REIT regimes of other Member States, thereby attracting real estate investments by European REITs from other Member States into their country. EPRAs proposal for a system of Mutual Recognition is presented in more detail in Section 6 and Appendix 1 of our response. These proposals have already been discussed and refined on a number of occasions with officials at DG Tax. We understand that the proposals were considered by DG tax as a part of discussions over the department work plan in 2012, but at the time were not considered to be of sufficient priority to formally adopt as part of the DG Market worksteam. Q24. To what extent can increased integration of financial and non-financial information help provide a clearer overview of a company s long-term performance, and contribute to better investment decision-making? Ref: The integration of non-financial information into reporting can help to ensure that the enterprise takes account of all risks to the future profitability of the enterprise. The vast majority of listed property companies and REITs produce either a separate sustainability report, or an annual report with a sustainability section. Although there is a limited amount of integration between financial and non-financial information, this is an area we are seeing develop rapidly though market driven pressure, particularly in the listed property sector, and we believe that the market should be allowed to develop without regulatory intervention at this stage. Indeed, intervention at an EU level could have the impact of slowing down or stalling market-driven developments. In short, in the real estate industry there is recognition that there is benefit in tracking nonfinancial data in order to inform understanding of all risks to the enterprise, but a deep understanding of the precise ways in which these risks manifest is the subject of a learning process. Whether due to legislation or market pressures, investors into real estate have started to 15

16 Section 3: - EPRA Response to specific questions in the Green Paper take an active stance towards integrating information on the sustainability of buildings and portfolios into their investment decisions. This activity is not simply being driven by a desire to make responsible investments, but rather by the positive influence that sustainability factors have on both risk and return of real estate companies and funds. This market development is being driven largely by the institutional investors and it is the listed property sector (including REITs) that is driving this change. Listed property companies show a much better environmental performance than do their private counterparts. The low scores may be partly due to the limited disclosure, as a result of which there is inadequate public scrutiny of property funds that operate in the private market. Moreover, the finite life of some private funds may lead to a more short-term focus and may hinder investments in energy efficiency. We conclude that private funds should consider their listed counterparts as benchmarks for "best practices" in environmental performance. Global Real Estate Sustainability Benchmark (GRESB) 2011 Report Many institutional investors such as pension funds have no direct control over the buildings they own, but they do have discretion over the property companies and investment managers they select. As the evidence mounts regarding the improved performance that implementing sustainability measures provides, an increasing number of real estate investors will select the property companies, investment managers and funds that have taken seriously the implementation of sustainability measures into the organization and the operation of property portfolios. Q25. Is there a need to develop specific long-term benchmarks? In terms of benchmarking how real estate owners manage risk on a relative basis, the Global Real Estate Sustainability Benchmark (GRESB) is an Amsterdam-based non-governmental organisation, backed by an already impressive list of institutional investors. GRESB last year obtained responses from 450 firms worldwide, covering 36,000 properties. The response rate to the GRESB survey increased by a factor of 30% from 2011 to 2012, suggesting that it could become a dominant feature of the real estate reporting landscape. In the light of the above, we do not think the Commission should seek to generate benchmarking or reporting structures at the present time for commercial real estate, as these are being delivered effectively by the private sector and, in the case of GRESB, on a global basis. 16

17 Section 3: - EPRA Response to specific questions in the Green Paper Q26. What further steps could be envisaged in terms of EU regulation or other reforms, to facilitate SME access to alternative sources of finance? Ref: We are concerned that a focus on SME s does not work well in the context objectives of the Green Paper. If the Green Paper is to devote particular attention to specific types of business, we would prefer that this was a sector led approach. Otherwise, valuable industry input and solutions may be overlooked. In our experience, businesses do not tend to identify or represent themselves as SME s, but rather as businesses in a particular sector. 17

18 Section 4 Real estate and the commercial property sector 4. Real Estate and the Commercial Property Sector 4.1. The built environment in all its forms, and the provision of long-term capital to the business sector that is responsible for this, should be a key focus of the practical solutions emerging from the EC Green Paper It is difficult to know whether real estate and the built environment is already an integral part of the objectives of the Green Paper and therefore the extent to which the relevance of this sector needs to be made and evidenced. In much of the published documentation we have seen related to this and other similar projects, the temptation seems to be to refer to infrastructure as being the obvious type of long-lived, tangible capital that needs to be better matched with the needs of long-term investors Nevertheless, at the risk of stating the obvious, commercial real estate in all its forms and the property companies that are responsible for sourcing that capital from the markets and putting it to productive use in the economy are highly relevant to the Green Paper objectives: the commercial property sector is responsible for the finance, design, delivery and operation of the built environment and of critical importance to the economy/citizens and real estate is an asset class that has very attractive long-term diversification attributes for institutional (long-term) investors. The commercial property sector 4.4. Real Estate itself encompasses a very broad spectrum of diverse, long-term assets. From offices, retail malls and residential housing, to healthcare facilities, schools, university accommodation and data centres. In other global markets outside Europe, the spectrum of assets included in the commercial property space is even broader, covering for example, prisons, forestry and energy infrastructure. In short, the commercial real estate sector is a key part of the provision of long-term tangible productive assets through the provision of:- Core, traditional real estate like offices, shops, warehouse and residential Non-core real estate such as data centres and storage facilities Social and community infrastructure such as hospitals, nursing homes, schools, university accommodation, cinemas, leisure centres and restaurants More traditional infrastructure such as (walkways, public spaces, transport improvements) that feature as part of their large-scale developments in partnership with local communities 2 2 For an illustration of this aspect of the contribution towards infrastructure, see 18

19 Section 4 Real estate and the commercial property sector 4.5. The range of business structures and activities functioning in the real estate sector also represents a very broad range of activities. From passive investment/asset management to fully integrated property companies engaged in the full spectrum of real estate activities from financing, designing, developing then operating and managing property. Institutional investors and commercial real estate 4.6. The involvement of institutional investors in the real estate investment process is critical. Large institutional investors are regarded as Universal Owners given the large, highlydiversified and long-term investment portfolios they possess. Their portfolios mirror the structure of capital markets. As such they are affected by wider economic and societal positive and negative externalities. Importantly, their role as social partners and ability to focus on longer-term economic and societal well-being as being fundamental to beneficiaries interests assists in generating wider economic and societal positive externalities In short, the role of institutional investors is not merely as purchaser of the end product. Rather, there is an alignment of the objectives of long-term universal investors and public authorities, not shared by shorter-term investors. The rejuvenation of Europe s decaying waterfront cities, rundown city centres and investment in job creation in deprived suburbs would not have occurred without the presence of long-term investors able to engage in private and public sector regeneration partnerships We welcome the Green Paper s references, in the list of long-lived capital tangible assets, to housing on page 2 and buildings on page 5. However, we believe the suggestion (at page 10) that institutional investors average exposure to infrastructure assets suffer as a result of their exposure to real estate is misconceived. This is not a zero-sum game: investment in real estate and infrastructure can be entirely complementary and regulators should encourage long-term investment in both. Real estate in the real economy 4.9. The built environment plays a vital role in every aspect of the European economy, society and environment. Businesses and society can't function without the services of commercial property, including the provision of offices, shops, factories, housing, social and community infrastructure and many other forms of real estate. The commercial property sector delivers and manages the infrastructure needed for entrepreneurship to thrive and is a fundamental source of employment and economic growth. The commercial real estate sector has a capital 19

20 Section 4 Real estate and the commercial property sector value of 5 trillion, making it comparable to the scale of Europe s equity ( 7.1 trillion) and bond markets ( 7.5 trillion) EPRA, together with the European Association for Investors in Non-listed Real Estate Vehicles (INREV) recently commissioned research which evaluates the role and importance of commercial real estate in the European economy 3. The report concluded that in 2011, the EU commercial property industry: Directly added 285 billion to the European Union s economy more than both the European automotive industry and telecommunication sector; Provided jobs for over 4 million people; Provided 3.5 billion square metres of commercial property floorspace to Europe s businesses; Accounted for 6 per cent of the assets held by insurance companies and pension funds to support the long-term saving needs of pensioners and other savers At 72%, construction accounts for the largest proportion of commercial real estate (CRE) employment. While investment, fund and portfolio management represent around 1% of CRE employment, they have a disproportionately high contribution to value added economic activity. Their activities underlie demand for third party agents (5% of CRE employment) and professional property management companies (23% of CRE employment). Moreover, they act as a stakeholder in the development process, stimulating construction demand Previous research has attempted to quantify the multiplier effect of construction activity, for example, on the wider UK economy. The results indicate that the impact is substantial. Every unit of investment in the sector delivers a multiple of 2.84 in terms of economic output On average, development and re-development of new and existing commercial real estate amount to 250 billion of capital investment per annum, representing 10% of total capital investment in Europe. The multiplier effect suggests this delivers an economic value of some 710 billion, equating to 6.8% of European GDP. In addition, there are further significant indirect and induced benefits that remain un-quantified. Towards an efficient commercial property sector An efficient commercial property sector improves the quality of European citizens lives, provides a healthy platform for businesses to operate effectively and for communities to function coherently The efficiency of the process through which the European real estate industry sources capital to develop, support, and maintain the built environment, and services its clients, should therefore be of crucial importance to policy makers. Although there are many factors that influence the well-being of European citizens and the European economy, a performing real 3 EPRA and INREV (2012) Real Estate in the Real Economy. 20