Guernsey: Real Estate Revenues Continue To Rise At Carey Group
Last Updated: 10 February 2015

Joe Truelove, Head of Fund Services was recently interviewed by Orlando Crowcroft on behalf of Business Life magazine about the current state of the real estate funds sector in the Channel Islands. Here are his thoughts.

Q. What have the last 12 months been like for real estate funds - have we seen more deals being done on a global scale?

At Carey Group we act for numerous clients who hold or manage real estate. This includes special purpose vehicles, investment funds and Main Market London Stock Exchange and AIM listed real estate oriented companies. Indeed our top five clients by revenue in 2014 are all real estate focused investment vehicles.

I can't comment on the volumes of deals on a global scale but my sense from the activity levels on our client base who do invest in international real estate is that 2014 has been an exceptional year.

We have seen an increased volume of activity across all types of structures which we administer and which hold or manage real estate as well as an increase in new business enquiries from real estate fund managers. Our real estate business has performed extremely well over the last twelve months.

Our real estate highlight for 2014 was probably the additional fund raising and relisting of Summit Germany Limited on AIM. This deal was particularly interesting because Summit Germany Limited had previously operated as a fund listed on AIM but after a period as a private fund then ceased to be a fund and relisted on AIM as a trading company which buys, develops, manages, lets and sells property in Germany with its own staff and premises rather than being a fund. This follows a pattern first established by Raven Russia; another Guernsey incorporated, listed trading company which used to be a fund.

The regulatory changes in the last few years in the investment funds market are driving real estate businesses away from being fund managers and towards being real estate company managers.

Q. How are Jersey and Guernsey doing and is one doing better than the other?

Jersey has traditionally had a greater exposure to real estate than Guernsey through the popularity of Jersey Property Unit Trusts (JPUTs) while Guernsey has been better known for private equity funds with access to real estate often through London Stock Exchange listed funds colloquially known as "Guernsey REITs". (REIT is an abbreviation for Real Estate Investment Trust and is a widely used onshore fund type designed for investing in real estate in a tax efficient way which originated in the US and has now been introduced by numerous onshore jurisdictions including the UK and Canada).

Guernsey continues to dominate the London listed funds market irrespective of asset class. The challenge to Guernsey in this space is not from Jersey but rather from the UK REIT as an alternative to a "Guernsey REIT".

In the UK, a company or group of companies can apply for 'UK-REIT' status, which exempts the company from corporation tax on profits and gains from their UK qualifying property rental businesses.

In return, UK-REITs are required to distribute at least 90% of their taxable income, for each accounting period, into the hands of investors, where the income is treated as property rental income rather than dividends. In this way taxation of income from property is moved from the corporate level to the investor level.

A "Guernsey REIT" offers a higher level of flexibility than the UK equivalent as it is not constrained by the rules described above in fact there is not a formal Guernsey REIT regime, merely a very flexible company law and corporate taxation regime which works equally well for funds and listed companies across all asset classes.

With private real estate funds it is much more difficult to identify whether one island is performing better than the other because the information is not public and statistics can be misleading whether for company incorporations, numbers of funds launched or values of asset under administration. At Carey Group in Guernsey we continue to be approached to act for both listed and unlisted real estate structures.

Q. Just what type of funds are being established globally – for instance for purchase of commercial/office/warehouse space? Is this reflected in the Channel Islands, or are we seeing a particular subset of funds being set up in the islands?

Guernsey is used as a fund domicile by fund managers from all corners of the world and I suspect that the trends we see here are representative of wider global developments. For example our client base exposes us to infrastructure including new docks being built in the UK and India, mixed use residential and commercial property development in the UK, Germany and Russia, we also act for student accommodation funds, nursing home groups, international hotel groups and funds investing in industrial properties.

Q. Are we seeing a shift to new types of funds?

In terms of structure we see almost exclusively closed ended property funds these days whether listed or not. A few managers with open ended property funds hit real problems with liquidity during the credit crisis and many have wound up although some open ended real estate funds did survive and continue today. Corporate structures can be listed on the London Stock Exchange (whether AIM, Main Market or Specialist Fund Market) or Channel Islands Securities Exchange and Cayman Stock Exchange while we recently received an enquiry for the listing of limited partnership interests on the Channel Islands Securities Exchange (CISE), which would not be possible on any of the London markets. A limited partnership is of course the classic investment vehicle for private equity managers and remains popular for private real estate funds with similar investor profiles.

We also administer and act as trustee to Guernsey property unit trusts (GPUTs) which may or may not be registered as funds. The GPUT is the less well publicised cousin of the JPUT but works equally well, and with Guernsey's simpler and more flexible investment fund regime, it is probably a better option for a real estate fund managers.

Q. Is there a general confidence about this sector – or are issues such as Russia creating problems?

With interest rates remaining at historic lows real estate continues to be a very popular asset class for deriving income while political uncertainty in Russia and the Middle East is making UK real estate in particular a safe haven for foreign owners who often structure their affairs through Guernsey structures. The Russian crisis has forced one of our Russian real estate development clients to postpone its initial public offering on AIM however Russian consumer demand for property ownership to protect against rising inflation there has stimulated the demand for new apartments being bought by cash buyers.

Q. What is the forward pipeline for real estate funds - projections?

We have a very healthy new business pipeline at the moment including potential new real estate funds and non-fund real estate structures. We are very positive about 2015 with respect to new real estate structure launches at Carey Group.

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