MoFoREAL: European Real Estate Newsletter (Q2 2022)

Welcome to the latest edition of MoFoReal, our newsletter highlighting recent activities of and other developments in MoFo’s European Real Estate team. In this edition, we consider the impact of the war in Ukraine on the European commercial real estate market as well as new transparency measures introduced by the UK government in response to the conflict.

As always, we hope you enjoy reading MoFoReal and welcome your feedback and suggestions for future issues.

Real estate and the war in Europe

By: Luisa Farmer, Associate, London 

Reflecting on the last quarter, it is difficult to ignore the ongoing war in Ukraine, another event with worldwide impacts. 

While it was great to see so many familiar faces at MIPIM – and to enjoy a bit of social normality – there were frequent reminders of the enduring challenges presented by the pandemic and the invasion unfolding on the other side of the continent. Unsurprisingly, often the talk turned to how the war will affect the European real estate market.

The market

Investment and leasing activity generally remains buoyant. On the investment side, this is likely in part thanks to the cash reserves or “dry powder” accumulated by both debt and equity investors, and also as a result of inflationary pressures that are tempting investors towards real estate given its potential for inflation hedging.  We touched on these points in our last newsletter in relation to our projections for the market’s performance but we now expect to see activity shifting away from central Europe and towards more established markets, such as London, Paris and Switzerland, due to the perceived lower risks in these areas.

With that said, the picture is still uncertain. Surging inflation and supply chain issues are putting significant pressure on key stakeholders as the costs of development and interest rates are on the rise.  As costs increase across the board, there is likely to be extreme resistance to rent increases from tenants (whether business or residential), and this will inevitably have an effect on investor yields, too.  Further, the more protracted the conflict in Ukraine, the more unstable the European economy and market sentiment will become – and presently most reports suggest that the war is unlikely to be over any time soon. As such, trends in the real estate market will continue to develop.

New transparency measures

What is certain is that the events in Ukraine have reinvigorated the UK Government’s desire to ensure “dirty money” has nowhere to hide in the UK.  Consequently, the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECA”) was expedited through the UK Parliament and enacted on 15 March 2022.

The ECA contains provisions on sanctions and, most notably for the commercial real estate industry, enhanced transparency measures for foreign entities that hold property in the UK.  In particular, the ECA introduces a mandatory obligation to register the beneficial owners of all such foreign entities at the UK’s Company Registry, Companies House (the “Register”).  The ECA also imposes an ongoing obligation to update or confirm the information on the Register every twelve months, similar to the existing obligation on English companies to file confirmation statements at Companies House.  

Note that these requirements will affect all non-UK entities holding UK property, not just those that might have a connection with sanctioned jurisdictions or traditional tax havens.  As most of our clients are international investors in one form or another, and often employ structures in which a non-UK entity holds the underlying real estate, this new obligation will require a response from most of them. 

We don’t yet know when the obligation to register will come into force[1] but, when it does, there will be a six-month window for compliance.  After that window lapses, failure to register could result in criminal penalties (for both the foreign entity itself and its officers) as well as restrictions on buying, selling, and/or mortgaging property.  Given these potentially significant consequences, and the time it may take to apply the new rules to complex holding structures (e.g., Jersey Property Unit Trusts (JPUTs)), we recommend analysing your portfolios sooner rather than later.

More information on the ECA and the Register can be found in our recent client alert.

If you have any questions, comments or views on the ECA or the state of the market, the MoFo Real Estate team is here to help.  Please do get in touch.

MoFo supports Ukrainian refugees

In Europe, our charitable giving programs are supporting Habitat for Humanity’s efforts to provide interim shelter for Ukrainian refugee families.

If you would like to donate, please use one of these links:

• Habitat for Humanity Great Britain
• Habitat for Humanity Deutschland

Recent deal highlights

In Q1 2022, MoFo’s European Real Estate Group was pleased to advise:

• Patron Capital VI, L.P. on its joint venture to acquire and regenerate a 42-acre waterfront site at  Daedalus, Lee-on-the-Solent. Partnering with Daedalus Development Company, owned by specialist development managers MurrayTwohig Development and Orwell Real Estate, the new joint venture has exchanged contracts to acquire the site in phases from Homes England. Its ambitious development proposes to deliver a mixed industrial and residential scheme with ancillary leisure uses intended to reinvigorate the local community and restore historic assets.
• A multinational banking corporation as lender in connection with a c. £110 million loan to finance the development of a data centre in London.
• Patron Capital VI, L.P. on the acquisition of Wishford Schools Group, in partnership with the CEO and founder, Sam Antrobus. Wishford is the owner and operator of a portfolio of private schools in southern England.
• Mirastar Real Estate Investment Management Limited on its new mandate to act as specialist asset and development manager to help expand and manage a new portfolio of logistics investments for a core-plus real estate investment fund managed by KKR.  The appointment was completed in March 2022 and Mirastar’s first UK acquisition under the new mandate, Harlow Icon Park in Essex, was announced in April 2022.
• Long time client MARK in respect of the English law aspects of the refinancing of a number of European assets in Amsterdam, Milan and Paris.

[1] The ECA provides that the regulations will set the date on which the Register will come into force.  As of the time of writing, the regulations have not yet been published.