Unlike many other jurisdictions, the UK does not have — but needs — a closed-ended or hybrid fund option for pension funds and institutions to hold UK real estate investments — a type of fund that is unlisted, tax transparent and offers tradable units.
Fund managers’ choices are limited. Either they can invest in open-ended authorised fund structures, which must comply with regulatory requirements that erode returns and may not be appropriate for holding illiquid assets; or they can use offshore alternatives, with the challenges and costs of multiple legal, tax and regulatory regimes.
However, the Treasury is offering to rectify this gap in the market, with a call for consultation. This could greatly improve the real estate funds sector by introducing the proposed Professional Investor Fund (PIF). The PIF is not open-ended and for regulatory purposes will protect investors as a UK alternative investment fund, and will also have the flexibility of an unregulated collective investment scheme.
PIFs are expected to be formalised as a deed between the alternative investment fund manager (AIFM) and depositary, with PIF investors becoming parties to the PIF deed. The AIFM will make decisions for the PIF investors on the acquisition, management and disposal of assets, as well as risk management, and these decisions will be binding on the investors.
Access to PIFs will be restricted to professional institutionals that commit at least £1m; other investors could only access these vehicles through feeder funds that satisfy the professional institutional investor status. Registration would be similar to that of English limited partnerships, offering speedy access to the market with no need for prior FCA approval. Income will be taxed on the share attributable to each investor, and capital gains taxed on investors that sell PIF units, but not on gains at the PIF portfolio level.
The PIF is expected to be formalised as a deed between the PIF’s alternative investment fund manager (AIFM) and depositary. On admission, investors become parties to the PIF deed and the AIFM will make decisions on behalf of the PIF investors such as the acquisition and disposal of the assets.
The PIF is a “win-win” product for government and industry. As a conduit for institutional productive capital, it can facilitate government goals for Covid-19 reconstruction, an infrastructure revolution and ‘levelling up’ the nation by supporting jobs outside of London.
Real estate and its funds sector have much to contribute, for example, by attracting capital and re-invigorating town centres, supporting social and affordable housing and developing social infrastructure. Other sectors can also utilise the PIF, as it is designed to be unconstrained in terms of eligible asset classes and investment strategies.
We have a unique opportunity to address the gap in the UK’s fund offering and improve the prospects for future generations of real estate fund managers. You are strongly encouraged to respond to the call for input and endorse the PIF by the 20 April reply date.
Melville Rodrigues is partner at Melville Rodrigues Consulting and led the AREF PIF proposal
Guide to finance: sector report March 2021
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Professional Investor Funds (PIFs) could fill the UK fund sector gap