So who had the UK deciding that international law is not for us or the introduction of a border in Kent on their Brexit Bingo card?
For John, the high point of September was to be quoted in the Blackstock Consulting daily briefing to the real estate industry for his tweet: "Mark Francois must now be worried that if the army is being used to help the police on Covid restrictions, it will not be available to invade France.” Despite the fact that it quoted John, the Blackstock briefing is really very good. You can sign up via this link. John’s tweet was obviously before the Government announced that rather than invading France, it was ceding Kent. This also features in our historical trivia at the end of the newsletter. Before that lots of updates on many of our favourite topics.
September has been eventful on the Brexit front. As the negotiators head into the ninth formal round of discussions, we still think that the most likely outcome is an incredibly flimsy deal, which the Prime Minister will present to the country as a glorious triumph. Although on that front, nothing has really changed, the last fortnight has been marked by large amounts of noise, in particular over the legislation that would allow UK domestic law to override the Withdrawal Agreement, and indeed other international agreements to which the UK has committed. We believe that this is sabre rattling from Prime Minister to keep his own troops in order as he prepares for climb downs on matters of substance in this week’s negotiations. The net effect has, however, been counter-productive. We will not comment on the UK domestic aspect, although resounding cheers from the Tory back benches seem in short supply. We are more concerned by two broader areas of negative impact:
a) It has reinforced concerns from the EU side that the UK cannot be trusted unless every “t” is crossed and every “I” dotted in the agreements, and even then adherence cannot be guaranteed. This makes the technical process of documenting what is agreed harder and increases the risk in areas where subjective judgements need to be exercised. We had already covered in our previous newsletter that for financial services, there is an increasing risk that a decision on equivalence will not be reached in time for the end of the transition period. The latest twist makes that more likely;
b) We are hearing anecdotal evidence from clients that the Government’s position that it can ignore international treaty obligations has gone down really badly with some cross-border investors.
One of the points that we have been making since the referendum was that the UK’s departure from the EU would coincide with major developments in the EU Capital Markets Union, making it more important for financial services businesses tp have access to the single market. Just as the UK was doing its best to sabotage a deal, the European Commission last week published "a new, ambitious Action Plan to boost the European Union's Capital Markets Union (CMU) over the coming years”. More on this below.
EU Capital Markets Union
As mentioned above, on 24th September, the European Commission published its new Action Plan to boost the European Union's Capital Markets Union (CMU). You can find it here.
This picks up many of the points raised in the Final Report of the High Level Forum on the Capital Markets Union A new Vision for Europe’s capital markets published on the 10th June and covered in our newsletter at the time.
The specific actions in the action plan, covering many of our long-standing favourite topics, are:
Action 1: The Commission will propose to set up an EU-wide platform (European single access point) that provides investors with seamless access to financial and sustainability-related company information.
Action 2: In order to promote and diversify small and innovative companies’ access to funding, the Commission will seek to simplify the listing rules for public markets.
Action 3: The Commission will review the legislative framework for European long-term investment funds (ELTIFs) with a view to channelling more long-term financing to companies and infrastructure projects, in particular those contributing to the objective of smart, sustainable and inclusive growth.
Action 4: The Commission will seek to remove regulatory obstacles for insurance companies to invest long-term, without harming financial stability and policyholder protection. It will also seek to provide for an appropriate prudential treatment of long-term SME equity investment by banks. Furthermore, it will assess possibilities of promoting market-making activities by banks and other financial firms.
Action 5: The Commission will assess the merits and feasibility of introducing a requirement for banks to direct SMEs, whose credit application they have turned down, to providers of alternative funding.
Action 6: In order to scale-up the securitisation market in the EU, the Commission will review the current regulatory framework for securitisation to enhance banks' credit provision to EU companies, in particular SMEs.
Action 7: The Commission will conduct a feasibility assessment for the development of a European financial competence framework. It will also assess the possibility of introducing a requirement for Member States to promote learning measures supporting financial education, in particular in relation to responsible and long-term investing.
Action 8: The Commission will assess the applicable rules in the area of inducements and disclosure and, where necessary, propose to amend the existing legal framework for retail investors to receive fair advice and clear and comparable product information. It will also propose how to reduce information overload for experienced retail investors, subject to appropriate safeguards. Finally, it will seek to improve the level of professional qualifications for advisors in the EU and assess the feasibility of setting up a pan-EU label for financial advisors.
Action 9: The Commission will facilitate the monitoring of pension adequacy in Member States through the development of pension dashboards. It will also develop best practices for the set-up of national tracking systems for individual Europeans. Finally, it will launch a study to analyse auto-enrolment practices and may analyse other practices to stimulate participation in occupational pension schemes, with a view to developing best practices for such systems across Member States.
Action 10: In order to lower costs for cross-border investors and prevent tax fraud, the Commission will propose a common, standardised, EU-wide system for withholding tax relief at source.
Action 11: To make the outcomes of insolvency proceedings more predictable, the Commission will take a legislative or non-legislative initiative for minimum harmonisation or increased convergence in targeted areas of non-bank insolvency law. In addition, together with the European Banking Authority, the Commission will explore possibilities to enhance data reporting in order to allow for a regular assessment of the effectiveness of national loan enforcement regimes.
Action 12: To facilitate cross-border investor engagement, the Commission will consider introducing an EU definition of 'shareholder' and further clarifying and harmonising rules governing the interaction between investors, intermediaries and issuers. It will also examine possible national barriers to the use of new digital technologies in this area.
Action 13: The Commission will consider amending rules to improve the cross-border provision of settlement services in the EU.
Action 14: The Commission will propose the creation of an effective and comprehensive post-trade consolidated tape for equity and equity-like financial instruments.
Action 15: The Commission will propose to strengthen the investment protection and facilitation framework in the EU.
Action 16: The Commission will work towards an enhanced single rulebook for capital markets by assessing the need for further harmonisation of EU rules and monitoring progress towards supervisory convergence. It will take stock of what has been achieved in Q4 2021 and consider proposing measures for stronger supervisory coordination or direct supervision by the European Supervisory Authorities.
The Commission will also carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets and act to address any shortcomings that are identified in the EU legal framework.
We are delighted to see yet another attempt to kick-start the ELTIF regime, a topic that has been providing us with opportunities for cynical derision since the start of John Forbes Consulting LLP in July 2013. A public consultation on ELTIFs is flagged as the first thing coming out of the blocks from the Commission for implementation of the Action Plan.
As we covered in our previous newsletter, there is a lot going on in the world of open-ended funds at the moment. At that time, we were anticipating the lifting of the valuation uncertainty clauses by the valuers. This has now happened and the funds that were suspended are now starting to reopen. We do not think that the suspension of funds due to valuation uncertainty provided retail investors with useful protection and we think that fund managers should be able to choose other ways to address valuation uncertainty. We will include this in our response to FCA consultation 20/15 and have shared our views on this with the Association of Real Estate Funds (AREF). We have also shared with AREF our broader concerns regarding the “one-size-fits-all” approach to notice periods favoured by the FCA and will cover this in more detail in our response to the FCA. Please feel free to get in touch if you would like to discuss this.
John was quoted in the Financial Times and REACT News on funds reopening following removal of the market valuation uncertainty clauses by the valuers. You can find the coverage here.
Investment Property Forum webinar "Open ended real estate funds under the spotlight”
John chaired this webinar on 15th September. A huge thank you to the panelists:
Aberdeen Standard Investments
Schroder Real Estate Investment Management
The Association of Real Estate Funds
You can download the recording here.
Thank you for all the positive feedback, it seems to have been very well received. Even John’s flouncy yellow bow tie received some positive comments.
DC pension consultation
On 11th September 2020, the Department for Work and Pensions published a consultation "Improving outcomes for members of defined contribution pension schemes”. You can find it here.
This is, perhaps surprisingly, a Government response to the February 2019 consultation "Investment Innovation and Future Consolidation". Better late than never. For the February 2019 consultation, as well as contributing to the Investment Property Forum and Association of Real Estate funds responses to the consultation, we submitted our own, which you can read here.
John will be part of the AREF working group to respond to the new consultation and we will also be responding separately.
More generally, you can find our paper from July Designing real estate funds for DC pension investment here.
Marketing to individual investors
The FCA have published a Call for Input: The Consumer Investments Market. This Call for Input is looks at areas where the FCA believes the consumer investment market is not working well for customers. There are two aspects that would appear to be relevant for the real estate investment management industry:
a) The general sections on retail investors and retail distribution provide an opportunity to feed back further on some of the challenges facing real estate funds for retail investors in light of the proposed changes currently under consultation;
b) The paper raises concerns over the extent to which individuals have been encouraged to treat themselves as sophisticated investors in circumstances which strongly suggest that they might not be as sophisticate as implied. We understand that some parts of the industry, at the more aggressive end of the crowdfunding market, may have been enthusiastic users of the "self certification as a sophisticated investor” route.
The deadline for responses to is 15th December 2020, so there is plenty of time to respond. We are feeding in our thoughts via industry bodies and may also respond separately.
You can find the Call for Input here.
AREF CTI & Expense Ratio Working Group
John chairs the Association of Real Estate Funds CTI (Cost Transparency Initiative) & Expense Ratio Working Group.
Having completed current tasks on the Cost Transparency Initiative, the working group has now moved on to its next task, reviewing and updating AREF expense ratios. INREV, which is the European Association for Investors in Non-listed Real Estate Vehicles, ANREV, which is the Asian association for Investors in Non-listed Real Estate Vehicles, NCREIF, which is National Council of Real Estate Investment Fiduciaries in the US and PREA, which is the Pension Real Estate Association in the US have agreed a common standard for a Total Global Expense Ratio (TGER). This is to be used from 1st January 2021. The AREF Working Group has concluded that unless there are compelling reasons for diverging, AREF should follow the new global standard.
The Working Group is working to have guidance available prior to the year end. Anyone who has views on this or wishes to contribute should contact AREF here.
Some general thoughts
Concerns that ESG considerations might cease to be a priority in the face of the mounting economic challenges from the crisis appear to have been misplaced. The widespread adoption by governments of the United Nations concept of “Build Back Better”, formally part of UN disaster planning since 2015, even if only in some cases as a snappy slogan, has ensured that ESG has remained at the top of the agenda. For the last two weeks, it would have been possible to fill most of the working day watching ESG / Build Back Better webinars for the real estate industry.
John was delighted to be a panelist on this subject at the recent Remit Consulting Associates Meeting. Apart from boring them senseless about EU ESG Regulatory Technical Standard consultation (more below), he made what he hopes are some vaguely relevant points on the increasing importance of ESG whether you are an investor with a short or a long time horizon. The UK has committed to a net zero carbon target by 2050. This is only thirty years away. A long-term investor has to consider the life of their asset over the pathway to net zero. Although a short term investor may not be thinking quite so directly about that pathway, their exit will be to someone who is focussed on that 2050 timetable. As more and more investors focus on this, the speed to obsolescence of less attractive assets will accelerate.
Many of the trends that we noted last year are continuing. There are a couple that we think are particularly important. There is an increasing recognition that
a) there are attractions to an investment strategy that delivers a positive impact rather than merely helping to mitigate the negative impact;
b) investors will struggle to have confidence that you are reliably delivering on the “E” and the “S” if you do not also have strong “G” in place.
John’s three non executive roles are with funds that are leading in this area, UBS Triton, the Urban Splash Residential Fund and Ginkgo Advisor Limited. We will write more on this in our next newsletter.
EU ESG Regulatory Technical Standard / SFDR
We covered the industry response in our previous newsletter. The European Supervisory Authorities (ESAs) have now published the responses received. You can find them here. Our summary of those with which we were involved, and the associated materials, is now on our website here.
The ESAs have now also published a survey setting out the details of templates for the presentation of the pre-contractual information to be disclosed under the SFDR. You can find it here. Although this will apply to real estate funds that are AIFs, as does the rest of the SFDR, we do not think there are any aspects of this that are particular to real estate as an asset class.
We have heard that European Commission has been discussing a possible delay to the implementation of the reporting framework, to 1st January 2022. If we hear more, we will update you.
Congratulations to our client Ginkgo Advisor Limited, for which John is the non executive chairman, which received its FCA approval on 22nd September. Ginkgo, which is Edmond de Rothschild’s specialist brownfield investment firm, is currently raising capital for its new UK Urban Brownfield Regeneration Fund - Ginkgo x Igloo - focusing on social and environmental impact through the remediation and regeneration of impaired sites. It is raising and attracting capital commitments from institutional investors including charitable foundations, trusts and impact investors.
ICAEW article - "Update: Covid-19 - The impending cash crunch for June quarter rents"
John recently contributed an article to for the ICAEW Construction & Real Estate Community, “Update: Covid-19 - The impending cash crunch for June quarter rents”, based on the ICAEW webinar at which John spoke in June.
You can find the article here.
SPS Virtual: Property, Infrastructure & Real Asset Investment Strategies for Pension Funds
8th October, 2020
John will be chairing a panel on real estate. You can find details here.
Oh my goodness, where to start. There are so many topics from which to choose. We were unable to pick between the final two, so this time a historical trivia double bill - the new Kent border and the cancellation of Christmas.
The new Kent border
It is some time since there was last a border in Kent. You have to go back to the Iron Age to find Kent (or at least a substantial part of it) as a separate kingdom. Up until the Romans arrived, although the whole of the UK was Celtic, Kent as far as the river Medway was occupied by Celts of more recent arrival from Belgium, possibly ruled from Belgium. In a minor point to annoy the Brexiteers further, Julius Caesar in his Gallic Wars (dē Bellō Gallicō) noted that the Belgae to the east of the Medway were far more sophisticated and civilised than the Britones who lived beyond that. Pah, who needs those new-fangled European innovations like money and trousers.
John received considerable social media coverage for his entirely spurious claim that Airfix was relaunching a Kent border set:
Cancellation of Christmas
As debate rages as to whether or not the Government will cancel Christmas this year, we feel it necessary to intervene to provide historical background. Some commentators have suggested that no British Government has ever cancelled Christmas, demonstrating a lamentable lack of familiarity with the Ordinance of 19th December 1644 An Ordinance for the better observation of the monethly Fast; and more especially the next Wednesday, commonly called The Feast of the Nativity of Christ, Thorowout the Kingdome of England and Dominion of Wales. The Ordinance required that public notice be given that Christmas would be marked by fasting and solemn contemplation at home rather than by giving liberty to carnall and sensuall delights.
Further detail was added in 1645 in the new Directory of Worship, which commented that Festival Days, vulgarly called Holy Days, having no warrant in the Word of God, are not to be continued. In 1647, Parliament passed an Ordinance confirming the abolition of the feasts of Christmas, Easter and Whitsun. Religious observance was to be in quiet contemplation at home rather than at church services. This proved to be contentious. In Canterbury, thousands (numbers may have been somewhat inflated in contemporary reporting) rioted demanding a sermon. We hope that Justin Welby is prepared for when this happens again.
In what may turn into a precedent for this Christmas, soldiers patrolled London on the look-out for secret feast preparation, seizing food. We look forward to hearing the Government’s plans for identifying and stamping out inter household turkey smuggling and illicit festive mingling.
Christmas celebration was banned from 1644 to 1660.
The period 1629 to 1660, with the personal rule by decree of Charles I, the Short Parliament, the Long Parliament and the Rump Parliament, provides a wide variety of fascinating precedents for our looming constitutional crisis, so we may return to this in later historical trivia.