The current exposure in the EU investment fund sector to the risks in real estate markets has been the subject of a recent publication, dated 10th January 2024, which was issued by the European Securities and Markets Authority (“ESMA”) as part of its ongoing Trends, Risks and Vulnerabilities (“TRV”) risk analysis.
The publication, entitled ‘ESMA TRV Report in real estate markets – Risk exposures in EU securities markets and investment funds’ (“TRV report”), provides data which shows that securities linked to real estate are increasingly utilised as collateral. Moreover, ESMA outlines in page three of the TRV report that there has been a substantial expansion in the realm of real estate EU alternative investment funds over the previous years.
ESMA notes that in relation to investments in real estate finance, the significance of Alternative Investment Funds (“AIFs”) has notably increased, presenting a parallel to the traditional banking sector’s role. The TRV report explains how the growth trajectory of these investment funds was noteworthy in the EU internal market, with assets under management multiplying significantly. This rise reflects a strategic shift in investment preferences, with a significant allocation towards commercial real estate and increasing interest in residential properties, indicating a diversification in real estate investment trends.
The TRV report also notes that the property market is intricately linked to the financial system through a variety of channels, with banks being the primary connection. However, this interrelation also extends to non-banking entities like insurance and pension funds, along with other intermediaries. Moreover, unlike their involvement with derivatives, real estate companies have limited engagement in securities financing transactions (“SFTs”). In fact, on page eight of the TRV report, ESMA observes that as of October 2023, only a small number of these firms, primarily private ones, participated in SFTs.
Whilst the ESMA report presents data pertaining to real estate in the EU banking sector and AIFs, Malta’s financial landscape includes three other fund types that are well-suited for real estate investments.
In addition to the AIF which has passporting rights throughout the EU internal market irrespective of the EU Member State where it is licensed, Malta also offers the Professional Investor Fund (“PIF”) regime which allows for the creation of a licensed investment vehicle in Malta that can be used to directly hold real estate or real estate financing instruments.
Furthermore, Malta offers the Notified Alternative Investment Fund (“NAIF”) and the recently introduced Notified Professional Investor Fund (“NPIF”). Both the NAIF and NPIF stand out for their expedited application processes. This is because, unlike traditional licensed funds, NAIFs and NPIFs operate under the management of a third-party investment manager who must be duly licensed by a regulatory authority recognised by the Malta Financial Services Authority.