In Austria a legal regime for investment funds regulated by the Investment Fund Act (Investmentfondsgesetz – "InvFG") on the basis of the UCITS-Directive (85/611/EEC) has already been in existence for many years. However, the InvFG applies solely to funds investing in securities. The existing "real estate funds" are usually stock corporations, which invest in real estate. Such funds are not regulated, except where they are made as a public offer, where certain specific prospectus requirements exist and semi-annual reports need to be published. If the shares in such corporations are listed on an exchange (or illiquid), the ´de-investment´ is difficult for the shareholders.
Therefore, the Austrian legislation had to react to the increasing demands of Austrian investors (who wish to enjoy a more secure real estate investment inter alia for pension planning) and financial institutions to create an alternative to foreign real estate funds. After several delays, the Austrian Real Estate Investment Fund Act (Immobilien-Investmentfondsgesetz – "ImmoInvFG") entered into force on 1 September 2003.
The following article provides an overview on the new ImmoInvFG.
1. Real Estate Investment Funds and Capital Investment Companies for Real Estate
Capital investment companies for real estate (Immobilienkapitalanlagegesellschaft – "ImmoKAG"), which manage real estate funds, are conducting a banking business (real estate fund business). They require a banking license and are supervised by the Austrian Financial Market Supervision Authority (Finanzmarktaufsichtsbehörde – "FMA") according to the Austrian Banking Act (Bankwesengesetz – "BWG"). Capital investment companies for real estate are, however, similar to the securities investment companies according to the InvFG, exempted from certain capital requirements of the BWG. Only stock corporations or companies with limited liability may conduct the real estate fund business.
The shares of the ImmoKAG must be registered and the assignment of shares of the ImmoKAG is subject to the approval of its supervisory board. An ImmoKAG may set up and manage several funds. The investor acquires shares in the respective fund and not in the ImmoKAG (which will be, at least in the beginning, subsidiaries of Austrian banks).
Since the ImmoInvFG only applies to funds exclusively investing in real estate and the required liquid assets, it does not allow for mixed funds investing in all types of securities and real estate. A major difference is that, unlike securities funds, where the fund shareholder is deemed to be co-owner of the assets acquired, the ImmoKAG itself – due to legal reasons relating to the provisions of the Land Registry – holds the total assets of the fund as trustee (on its own behalf but for the economic interests of the shareholders).
Special provisions apply to so called special real estate funds, the shares of which may be held by no more than ten subscribers. The subscribers of special real estate funds must not be ´natural´ persons. Therefore, the investor protection provisions of the ImmoKAG (e.g. the obligation to issue a prospectus) do not fully apply with respect to special real estate funds.
The ImmoKAG is obliged to publish annual statements of accounts for each real estate fund and in addition mid-year statements for the first 6 months of each fiscal year.
The ImmoKAG may entrust third parties with the management of a fund but remains liable for any negligence of such third party.
Before the real estate fund is established and the share certificates are offered to the public, a prospectus must be published. The prospectus has to contain – in addition to other information – the fund rules, which require the approval of the FMA.
2. Custodian Bank
Only a credit institution, which is authorised to conduct the deposit business according to the BWG or a branch of an EEA-credit institution (carrying out its banking business in Austria on the basis of an European Passport under the Banking Directives) is entitled to act as custodian bank for real estate funds. The appointment and the replacement of the custodian bank requires FMA approval.
Primarily, the duties of the custodian bank must satisfy investor protection requirements. The custodian bank issues and redeems share certificates, disburses profits to shareholders and holds the funds assets (other than real estate registered with the Land Register). The custodian bank is liable for any damage caused by its negligent business conduct in relation to the ImmoKAG and the shareholders.
3. Share Certificates and Share Price
Share certificates representing participation in a fund (but not in the ImmoKAG itself) are issued by the ImmoKAG and are securities.
Contrary to the InvFG, the share certificates of real estate investment funds do not document co-ownership but rather a claim in personam against the ImmoKAG. The share certificates may only be issued to subscribers when the offering price is fully paid.
The total value of the assets of a real estate fund has to be determined at least once a year by two independent experts. The price of a share results from the total fund value divided by the number of shares issued. A revaluation of the fund must take place as soon as developments indicate a positive or negative deviation of more than 10 per cent.
The ImmoKAG is obliged to publish the offering price and the redemption price every time an issue or redemption of shares in the fund takes place but must do so in any case, at least twice a month. Presumably, in practise, a daily pricing will be provided.
Basically, every shareholder is entitled to redeem his share certificates against the ImmoKAG at any time on the basis of the share price valuated by the custodian bank and to claim immediate disbursement of the share price. In extraordinary circumstances, repayment can temporarily be suspended and made subject to the sale of fund assets and receipt of the realization of the proceeds.
4. Registration with the Land Register
The ownership in domestic real estate by a real estate fund has to be registered with the Austrian Land Register. Further – to protect investors – the actual restriction that the ImmoKAG is allowed to sell or encumber real estate only with the approval of the custodian bank must be registered. The custodian bank is obliged to control these mandatory registration requirements. Any entries into the Austrian Land Register, which require the approval of the custodian bank, may only be effected with the custodian bank´s prior written consent.
Foreign real estate may only be acquired with the consent of the custodian bank, which may only be granted if the custodian bank is in control of the ImmoKAG transactions for the acquisition, sale and encumbrance of foreign real estate.
5. Conflicts of Interest
For the managers or members of the supervisory board of the ImmoKAG and the custodian bank, as well as for the experts evaluating the fund assets transaction, prohibitions exist in order to ensure that there is no conflict of interest. These persons are not allowed to buy from, or sell to, the respective funds.
6. Investment Restrictions
Only the ImmoKAG is authorized to dispose of and to exercise the rights connected with the fund assets. The ImmoKAG acts on its own behalf but for the economic interests of the shareholders. As a basic principle, assets of a real estate fund may not be pledged or otherwise encumbered. Short term loans taken by the ImmoKAG on behalf of a fund are admissible up to 20 percent of the fund assets (40 percent in case of special real estate funds). Furthermore, the ImmoKAG is allowed to acquire, sell or encumber real estate, building leases (Baurechte), buildings on foreign land (Superädifikate) or shares in real estate companies only with the approval of the custodian bank. A disposal made without the custodian bank´s approval, is void. However, if the disposal is consistent with the ImmoInvFG and the fund rules, the custodian bank is obliged to approve it.
In sections 21 and 22 ImmoInvFG, which generally correspond to the German KAGG, the asset and risk diversification provisions are laid down. Subject to the fund rules, a real estate fund may (in some cases if certain additional requirements are met) invest in the following assets in a member state of the EU or the EEA:
· real estate with buildings;
· real estate under building development;
· real estates without buildings if determined and appropriate for building development;
· building leases (Baurechte), buildings on foreign land (Superädifikate) and flats.
Assets may be acquired only after at least two experts have provided independent assessments. Furthermore, the consideration to be paid by the fund must not substantially exceed the value determined by the experts.
Acquiring real estate outside the EU (or the EEA) is permissible if at the time of the acquisition the value, together with the value of such real estate already held in the fund, does not exceed 20 percent of the total fund assets. This possibility has to be stipulated in the fund provisions.
Furthermore, inter alia a real estate fund must not hold less than 10 different assets (of the classes mentioned above) and none of the assets at the time of their acquisition may exceed 20 percent of the fund assets. An economic unit consisting of several properties are deemed to be one asset. However, these restrictions will only apply 3 years after the fund is established.
To create a fund of funds is forbidden. However, if provided by the fund rules an indirect investment through the participation in real estate companies is acceptable if in such cases acquiring real estate directly through the ImmoKAG is legally not possible (e.g. in certain countries real estate acquisition restrictions exist for foreign persons).
A real estate fund may make use of derivatives under specific conditions and only for hedging purposes.
These provisions of the ImmoInvFG widely correspond to the German KAGG.
7. Valuation of Real Estate
The law contains elaborate rules for – in the absence of market prices for real estate – the necessary assessment of the value of the real estate held in the fund. At least an annual appraisal by two independent, professional and suitable experts is required. Furthermore, an assessment must take place upon the acquisition, sale or encumbrance of real estate. Strikingly, the law provides for joint and several liability of the ImmoKAG and the custodian bank. Both are, in addition to the experts, jointly liable for the experts´ negligence. In practice this will be a major cost factor as, in addition to the costs of the expert opinions, considerable costs for professional liability insurance will also accrue.
The ImmoKAG is obliged to hold 10 percent of the fund assets in liquid assets. This is necessary to facilitate the redemption of fund certificates. Such liquid assets have to be comprised of cash (not bound for more than one year) or bonds with a maximum residual term of three years.
9. Tax Treatment of Real Estate Funds
The general principles underlying the tax treatment of real estate investment funds do not differ from that of (securities) investment funds. The fund itself is not subject to corporate income tax but the shareholders are subject to taxation. Effective distributions as well as fictitious distributions of retained profits are subject to income tax at shareholder level. Not only regular profits derived from the real estate such as income from rent but also 80 percent of the increase in value of the real estate, even if not realized, is taxed.
From a tax point of view the great advantage for ´natural´ persons investing in real estate funds instead of direct investment in real estate, is the tax rate. Austrian law provides for a capital gains tax applicable to income from real estate funds, which means a tax rate of only 25 percent as opposed to income tax rates of up to 50 percent in case of direct investments (for the income from rents). On the other hand, in direct investments, an increase of the value (in the case of ´natural´ persons) is only taxed if there is an actual sale within 10 (or in some cases 15) years of acquisition. By making capital gains tax applicable to income from real estate funds, in essence, equal tax treatment of real estate funds and security funds is achieved.
According to investment experts, the market potential of real estate funds in Austria within the next ten years amounts to an estimated EUR 8 billion. Realizing the potential will mainly depend on the question as to whether the Austrian real estate investment funds – despite of the costs of valuation and taxation of not realized profits – will be able to generate an adequate return on investment. Based on the fact that in Germany real estate funds, which have existed for over 40 years, represent the third largest asset class, the future of real estate investment funds in Austria should be a hopeful one.
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