A cross-service line team of Chula O'Donoghue, Sophie Reguengo, Katharine Marshall and Kevin Grové recently attended the Fourth Annual Real Estate & Real Estate Funds Conference in Jersey. Sophie was one of the industry experts from across the real estate finance, investment funds and asset management space invited to speak at the conference, with a presentation on the impact of new substance legislation on Jersey fund managers. Here the team provide their observations on the major talking points of the day.
Consequences for Jersey of amendments to the UK tax regime
A presentation delivered by Louise Cookson, Senior Tutor at BPP, highlighted the ongoing efforts of the UK to level the playing field between UK and non-UK resident vehicles holding UK real estate, and the impact of these efforts on Jersey. The discussion highlighted a need to keep emphasising Jersey's unique value offering, including its excellent service delivery, professionalism, expertise as a jurisdiction and, importantly, its statutory framework.
"We have greater flexibility in the corporate structures that we can set up - a good example is declaration of dividends (being able to declare a dividend based on cash flow solvency, rather than necessarily having distributable reserves), which is key as investors will want to know that they can get their hands on their returns as efficiently as possible. Another is that we have LLCs coming on to the books and JPUTs are re-gaining in popularity as a direct consequence of the amendments to the UK tax regime." said Kevin Grové.
Jersey's other unique advantages have also put it in a strong position to withstand these latest developments: "Jersey continues to offer a robust and advantageous corporate tax regime with an acknowledged appropriate regulatory framework. This, combined with the good communication links enjoyed by Jersey and of course the lifestyle advantages, should continue to make the Island attractive in years to come." said Katharine Marshall.
The commercial impact of changing lifestyles
Another focus of the conference was the commercial aspect of the real estate market and how lifestyle trends are driving change in the industry, the adoption of technology (so called 'PropTech') being just one example.
"The UK especially is leading with tech in areas such as facilities management, agent tools, construction management, home services and portfolio management.
"There is also a people-driven change where the real estate market changes with the habits of consumer and business needs. It is therefore imperative that investors 'know their customer'. People's shopping habits are changing and it's important for the real estate market to move with those changes. The result is that some retailers are going out of business as online sales are affecting the high street but there is still demand for the high street (particularly for luxury items and as destination shopping centres).
"Jersey is playing on a global stage and we need to collaborate as a financial services industry to successfully adapt and lead in this rapidly changing environment." said Chula O'Donoghue.
Political uncertainty and its impact on investor behaviour
Presentations from Owen Lynch (Director of LGL Trustees) and Dr Desné Masie (Senior Associate in Financial Services at Global Counsel) indicated that many investors were in a holding pattern before 31 March, something which Katharine has also noted: "Comments around Brexit delays meaning many investors are "on hold" ring true with my experience of the UK market presently." she said.
"The UK is currently seeing a long period of investment (potentially driven by perception of cheap sterling). Investors need to be aware that the process is going to continue for some period of time following 31 October 2019, irrespective of whether there is a deal or not. As such, valuations in real estate at present are very high." said Chula.
These potential seismic shifts in the political landscape are something that investors should prepare for, argues Sophie: "I liked Desné's statement that it's time to Brexit-proof your portfolios; think about the possible outcomes of a no-deal Brexit - or other potential political changes - and act now."
Trends in structuring and investment in real estate
Different approaches to risk and structures continue to vary based on who is investing and how: "Owen Lynch talked about capital flows in Jersey from the Middle East and Canada and noted the growth in family offices filling the gap left by the institutional investors, who are less inclined to use structuring these days. Family offices like structuring and know how to use it appropriately." said Sophie.
"Interest rates have to rise so fund managers are likely to now spend entire careers fighting the rise in interest rates. Will there be a decrease in allocations to real estate as a result? Being a traditional investor is risky nowadays.
"As banks are risk averse, we see opportunities for private debt funds to plug the funding gap for co-living development projects. There are also changes in the retail sector affecting the way shopping centres collect revenue from tenants and allow for variations to the terms of leases to allow more pop-up style shops. This changes the risk profile for a lender." said Sophie.
The role of blockchain as a disruptor in the funds space continues to grow - points were made about the JFSC's pragmatic approach and there was positive feedback from industry representatives about the quality of service providers in the Island.
Women in real estate
As with many industries, diversity and inclusion continues to be a challenge for real estate. Amanda Clark's (CBRE) talk focussed on how real estate can improve gender diversity, highlighting that this is not (or not just) a pipeline problem, but extends to a retention and recognition issue with fundamental implications for corporate culture.