Real Estate Investment Funds In Luxembourg – Fund Management/ REITs

Looking to raise capital in Europe and around the world and invest in real estate? Choose a Luxembourg investment fund.

​Looking to raise capital in Europe and around the world and invest in real estate? Choose a Luxembourg investment fund. 

Introduction

Looking to raise capital in Europe and around the world and
invest in real estate? Choose a Luxembourg investment fund.

Luxembourg’s adaptable legal and tax environment has
positioned it as a European hub for diverse investment vehicles,
particularly real estate funds, catering to global investors’
needs. Its robust security interest system bolsters creditor
protection, establishing it as a secure global financing domicile.
Asset management through pooled funds often involves special
purpose vehicles for ringfencing and tax efficiency. With 80+
double tax treaties and evolving corporate laws, Luxembourg
provides streamlined options for acquisitions, joint ventures, and
employee participation schemes.

Structuring of Luxembourg REIFs

Within a sophisticated Luxembourg toolbox, the choice of the
real estate investment fund (REIF) vehicle
typically depends on the target market in terms of capital raising
and investment opportunities. Luxembourg REIFs can take the form of
regulated entities, under direct supervision by the CSSF
(Luxembourg’s regulator), or unregulated entities and can
either be managed by a European manager, authorized to market the
fund through the European passport regime, or by a registered or
nonEuropean manager utilising national private placement regimes to
raise funds. These REIF products can be categorised into two
groups: (i) retail REIFs with strict investment limitations and
(ii) REIFs tailored for professional and high-net-worth investors
offering varying degrees of investment flexibility. For managers
pursuing diverse investment strategies, such as targeting specific
sectors or regions, Luxembourg REIFs often facilitate the
structuring of multi-compartment (or umbrella) vehicles. In an
umbrella, each compartment is associated with a distinct investment
portfolio segregated from other compartments’ portfolios via
legal ring-fencing. This ensures that the assets of each
compartment solely serve the rights of investors and creditors
related to that specific compartment.

“Luxembourg’s adaptable legal and tax environment has
positioned it as a European hub for diverse investment vehicles,
particularly real estate funds, catering to global investors’
needs.”

Managers aiming at retail investors must structure their
Luxembourg REIF as an Undertaking for Collective Investments,
governed by Part II of the Law of 17 December 2010 (Part II
UCI
). Part II UCI requires prior approval and ongoing
oversight by the CSSF, and the appointment of an alternative
investment fund manager (AIFM) authorised under
the Directive 2011/61/EU on Alternative Investment Fund Managers
(AIFMD). It stands as Luxembourg’s sole
alternative investment fund accessible to retail investors.
However, the distribution of Part II UCIs to retail investors
within the European Economic Area (EEA) is
contingent upon local regulations in each respective jurisdiction,
as there is no European retail passport under the AIFMD.

Part II UCI may invest in diverse real estate assets and
strategies, as long as it doesn’t allocate over 20% of net
assets to a single property (this limit becomes effective upon
property acquisition, and after a maximum four-year ramp-up
period). Additionally, the aggregate borrowing of Part II UCI
cannot exceed an average of 50% of the valuation of its
properties.

To facilitate distribution to retail investors in the EEA,
managers can incorporate a European Long Term Investment Fund
(ELTIF) ‘wrapper’ into their Part II UCI. A Part II UCI, or
a compartment thereof, could benefit of the ELTIF label and
distribution passport available under the amended Regulation
2015/760, provided the AIFM is EU-authorsied, and over 55% of
capital is invested in eligible real assets. ELTIFs entail stricter
investment rules than Part II UCIs without ELTIF wrapper, including
limitations on techniques like short selling, repos, securities
lending and use of financial derivatives. ELTIFs can only be set up
as master-feeder structures, provided both the feeder and the
master are ELTIFs, and fund-of-fund ELTIFs can only target European
AIFs.

ELTIF lures retail investors in EEA with distribution passport
whereas Part II UCI offers structuring flexibilities (open/
closed-ended, limited/unlimited term). There is growing interest in
hybrid models with ELTIF compartments under umbrella Part II
UCIs.

Managers targeting professional and semi-professional investors
can opt for various Luxembourg REIF regimes:

Specialised Investment Fund (SIF) under the Law of 13 February
2007
Investment Company in Risk Capital (SICAR) under the Law of 15
June 2004
Reserved Alternative Investment Fund (RAIF) under the Law of 23
July 2016

These REIFs are reserved to ‘well-informed investors’,
i.e., institutional investors, professional investors and investors
who have confirmed in writing that they adhere to the well-informed
investor status, and who either invest a minimum of EUR 100,000 or
have been assessed by an eligible financial institution.

SIFs and SIF-like RAIFs can invest in various real estate assets
and pursue any real estate strategy, subject to a 30% concentration
rule. SICARs and SICAR-like RAIFs are not subject to
diversification requirements but may only invest indirectly via
entities in ‘risk capital’ qualifying assets with an
intention to develop a project (no core/core plus strategies).

SIFs and SICARs require prior CSSF approval, while RAIFs are
formed and operate without CSSF’s involvement. However, whereas
SIFs and SICARs may be managed by registered or non-European AIFMs,
a RAIF must appoint an EU-authorised AIFM.

It is also possible to structure a Luxembourg REIF outside the
ambit of product laws, taking on any Luxembourg corporate form,
contingent on AIFMD compliance. The most favored entity is the
Luxembourg special limited partnership, functioning as an
alternative investment fund, managed by an EU-authorised AIFM,
registered European AIFM, or non-European AIFM, depending on assets
under management, and the requirement for a European marketing
passport to raise capital. Such REIFs are exempt from CSSF
supervision and investment constraints.

“To facilitate distribution to retail investors in the EEA,
managers can incorporate a European Long Term Investment Fund
(ELTIF) ‘wrapper’ into their Part II UCI.”

Except SICARs, Luxembourg REIFs can be SICAVs (variable capital
investment companies) or FCPs (co-ownership managed by Luxembourg
management company). A SICAV is a Luxembourg company (of any type)
whose capital constantly fluctuates, without any further
formalities, with changes in subscriptions, redemptions and
valuation of assets, so that it is at all times equal to the net
asset value of the company (i.e., the value of its assets minus
liabilities). An FCP is not a legal entity. Investors subscribe for
units in the FCP which represent a portion of the net assets, and
they are only liable up to the amount they have contributed. Voting
rights are typically absent for FCP investors, and decisions
regarding investments and operations rest with the management
company, unless otherwise specified in fund documentation.

The administration of a Luxembourg REIF requires the appointment
of a Luxembourg depositary, responsible for verifying asset
ownership. Eligible depositaries encompass Luxembourg credit
institutions and professional depositaries for assets other than
financial instruments.

The annual report of a Luxembourg REIF must be audited by a
Luxembourg authorised independent auditor (réviseur
d’entreprises agréé
). Luxembourg GAAP and
IFRS are the applicable accounting standards, except for
unregulated alternative investment funds in the form of special
limited partnerships.

The registered office and central administration of a Luxembourg
REIF must reside in Luxembourg. Hence, in instances where adequate
internal resources are lacking, the appointment of a domiciliary
and fund administrator, overseen by the CSSF, is necessary for the
administration of a Luxembourg REIF.

External financing solutions for Luxembourg REIFs

External financing solutions are available to managers of
Luxembourg REIFs at all levels of the capital structure.

“Luxembourg REIFs’ managers may also have access to net
asset value (NAV) or asset-backed financing arrangements.”

The subscription line financing is a useful liquidity tool,
frequently used by REIF managers. Also called, capital call
facility, this financing is provided by lenders directly to the
fund, where the recourse of the lenders is to the uncalled investor
commitments of the fund. These arrangements are usually short-term
facilities used to bridge the capital contributions of the
investors and are subject to a borrowing base, determined by the
value of the investors’ available commitments satisfying
certain eligibility criteria. Typically, the security package is
comprised of a pledge by the fund of its rights under the uncalled
investors’ commitments, and the claims against the investors in
relation thereto, as well as of a pledge over the bank account
dedicated to investors’ contributions.

Luxembourg REIFs’ managers may also have access to net asset
value (NAV) or asset-backed financing arrangements. These borrowing
arrangements are facilities made available to the fund (or an SPV
held by the fund) with recourse to the fund’s portfolio of
assets. Given that the borrowing base is calculated on the net
asset value of the assets of the fund (being the primary source of
repayment), this financing product is usually made available at an
advanced stage of the investment period, once the REIF has acquired
sufficient investments. Lenders will analyse the underlying
investments, as well as cash flows and other distributions that the
REIF will receive from those investments. The security package may
be composed of pledge over shares, receivables, loans and/or bank
accounts into which investments proceeds are to be paid with the
aim to allow the lender to control the underlying assets or
distributions paid on such assets. NAV facilities may be used for
working capital, follow-on investments, distributions or provide
liquidity to distressed portfolio companies.

Hybrid products combining subscription financing and NAV
financing features may also be used by Luxembourg REIFs.

At asset level, a secured loan made by third party lenders
remains the key financing tool for managers of REIFs, with two main
types of product: the investment loan (financing of an existing
property let to existing tenants) and the development loan
(financing of a purchase and development of a property). The
borrowing entity is usually the company holding the real estate
asset and the typical security package for these financings are a
mortgage over the financed property, as well as security interests
over any other of the borrower’s assets, such as bank accounts
into which any accounts or proceeds are paid. It is also common for
the shareholder of the borrower to pledge all its interests (shares
and claims) in the borrower. In addition, in a development loan,
lenders will also seek to take security over the rights of the
developer in respect of any development documents during the
construction phase. Lenders may also require that the REIF provides
credit support for the obligations of the borrowing entities
(notably equity commitment letters or guarantees).

Where the amount of the loan to be advanced (combined with the
REIF’s equity contribution) is not sufficient to finance the
project, mezzanine financing solutions, which will be structurally
or contractually subordinated to the senior lenders’ debt, can
be implemented to bridge the gap.

A view from underneath the REIF – SPVs, co-investments,
and joint ventures

In addition to being the jurisdiction of choice for the
establishment of the fund, Luxembourg is also a suitable
destination for the asset acquisition structure of the REIF due to
its flexible but predictable tax, legal, regulatory and general
commercial environment. In addition, Luxembourg collateral law
offers a unique blend of flexibility and certainty for the
creation, perfection and enforcement of security interests (in
particular over the shares of a Luxembourg company), making
Luxembourg a jurisdiction of choice for structuring leveraged
finance transactions in particular.

An important point of attention from a Luxembourg law
perspective is the fact that Luxembourg follows the “real
seat” theory, which means that – unlike other jurisdictions
such as the Netherlands, Ireland and the United Kingdom, which
follow the “incorporation” theory – a Luxembourg entity
is considered to be a Luxembourg entity and subject to Luxembourg
law only, to the extent that it has its “real seat” in
Luxembourg. Many different terms are used in connection with this
concept – ‘central administration’, ‘principal place of
business’, ‘effective management’, ‘domicile’ -
with Luxembourg company law referring to both ‘central
administration’ and ‘domicile’. Under Luxembourg
company law, there is a rebuttable presumption as a matter of law
that the central administration of a company is located at the
address of its registered office.

The presence or substance of the company in Luxembourg may also
be a condition for access to tax benefits (in particular under tax
treaties). In the case of a tax transparent fund, such access to
tax treaty benefits may be particularly important for the
Luxembourg company (typically a SARL and often referred to as a
Master HoldCo) that sits immediately below the REIF, and is used by
the REIF as an investment platform.

A chain of Luxembourg companies is often involved in the
acquisition structure set up below the Master HoldCo in order to
meet the various liability shield, tax or financing structuring
requirements. For investments of a REIF, the Luxembourg
société à responsabilité
limitée
(SARL) remains the most popular choice for
financing entities and acquisition vehicles further down the
chain.

A leveraged acquisition structure will typically include at
least one other mid-tier holding SARL above the SPV used to invest
in the property, with additional holding SARLs potentially added to
the chain to facilitate co-investments or joint ventures.

“Under Luxembourg company law, there is a rebuttable
presumption as a matter of law that the central administration of a
company is located at the address of its registered
office.”

While typical joint ventures between the REIF (via a chain of
subsidiaries) and the asset manager are designed to marry the
interests of the capital provider with the expertise and asset
servicing knowledge of the asset manager, while ensuring that the
manager has sufficient “skin in the game”, co-investments
are becoming increasingly popular with investors seeking to gain
more direct exposure to interesting and attractive assets, while
benefiting from a better deal on fees, or a better grip on
governance and exit strategy.

A wide range of financing structures are available under
Luxembourg law. Typically, transactions are funded by investors
through a variety of different financing instruments, split between
equity (ordinary shares, preference shares, warrants) and debt
(loans, bonds, preference shares), with most transactions involving
a combination of two or more such instruments. Bank financing is
typically secured by pledge agreements (most commonly share
pledges, receivables pledges and account pledges).

In terms of exit, the most common full exit mechanism is the
sale of the SPV holding the assets, followed by the liquidation of
the holding stack. In a partial exit scenario, cash is returned to
the REIF through share redemptions, dividend distributions or debt
repayments, or a combination of these.

Conclusion

The Luxembourg real estate fund landscape is characterised by
several notable trends. One prominent trend is the sustained growth
of larger funds, boasting assets under management exceeding one
billion EUR. Despite current concerns about rising interest rates,
the appetite for alternative investments and private assets is
steadily growing. Investors are looking for innovative products
aligning with long-term objectives and diversification.
Alternatives, including real estate, are also becoming integral to
pension solutions. With interest rates stabilising as central bank
policies become more predictable, a renewed interest in real estate
investments is anticipated, with a particular focus on
sustainability, underlining the sector’s resilience and
potential upswing. With its global reputation for real estate
investment funds, Luxembourg is well equipped to provide solutions
for all stages and needs of the real estate fund and investment
lifecycle, and is expected to remain at the forefront of
developments.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

 

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