On January 1, 2018, an EU regulation regarding “packaged retail insurance-based investment products,” or PRIIPs, went into effect. While the primary targets of the PRIIPs Regulation are securities offered to retail investors in the debt capital markets or by investment funds, the definition of PRIIPs includes very broad language: “an investment where, regardless of the legal form, the amount repayable to the retail investor is subject to fluctuations, because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor.”
There has been a great deal of confusion, particularly in the UK, as to whether shares of U.S. exchange-listed equity REITs are PRIIPs. For example, a February 2018 article in the Financial Times reported that investors have been locked out of investing in some of the largest such REITs after brokers could not conclude that the requirements of the PRIIPs Regulation do not apply. The confusion stems in part from a distinction the London Stock Exchange makes between REITs structured as commercial property companies and REITs structured as investment vehicles. This confusion is particularly puzzling with respect to U.S. exchange-listed equity REITs because guidance from the UK’s Financial Conduct Authority, or FCA, states that assets such as corporate shares or bonds held directly by the retail investor are not PRIIPs. Yet the FCA is quoted in the FT article as saying that REITs would be subject to the PRIIPs Regulation. The confusion as to the treatment of U.S. exchange-listed equity REITs is particularly puzzling because shares of “traditional UK property companies” like British Land, Land Securities and Hammerson are not considered PRIIPs.
Technical concerns regarding the reach of the PRIIPs Regulation are reminiscent of those U.S. exchange-listed equity REITs faced when the Alternative Investment Fund Managers Directive, or AIFMD, was implemented throughout the European Union. Those rules generally impose various registration and reporting requirements on the managers of “alternative investment funds,” or AIFs, and apply even to non-EU managers of non-EU AIFs if the AIF is raising equity capital in the EU.
In our November 19, 2014 REIT Alert, “REITs and the Alternative Investment Fund Managers Directive,” we discussed how the AIFMD might impact U.S. exchange-listed equity REITs and examined the status of such REITs as possible AIFs under the then new rules. This REIT Alert focuses on similar issues regarding the PRIIPs Regulation. The two sets of issues are equally important because capital raising is increasingly global and even for strictly U.S. domestic REITs, underwriters and placement agents routinely seek to add a European tranche to U.S. offerings. Moreover, for REITs that have acquired, or are considering acquiring, assets in Europe, access to the broadest possible European real estate investor base may be a key strategic goal or advantage.
The ability to raise equity capital in Europe on an equal footing with all other U.S. publicly traded companies is becoming increasingly important to U.S. exchange-listed equity REITs, of whatever variety or sector, and therefore, determining whether and how the PRIIPs Regulation may affect retail investors investing in the shares of such REITs in Europe is a gating question.
As is the case for EU rules defining an AIF, the PRIIPs Regulation is broadly written and may implicate business entities and enterprises that would not otherwise have considered themselves “packaged retail insurance-based investment products.” Many U.S. REITs whose equity securities are listed for trading on major exchanges would have no reason to consider their shares PRIIPs any more than operating companies in any industry other than real estate. Unfortunately, the PRIIPs Regulation, like the AIFMD, provides no blanket rule for REITs and, to date, among REITs formed in EU jurisdictions, some have concluded that they are subject to the PRIIPs Regulation, while others have not. As more fully addressed below, we believe that the structure and operations most publicly traded U.S. exchange-listed equity REITs will enable them to sufficiently differentiate themselves from the type of investments intended to be covered by the PRIIPs Regulation to conclude that they are not subject to it.
Are REIT Shares PRIIPs?
To decide whether shares of a particular U.S. exchange-listed equity REIT are PRIIPs, all relevant operational facts and circumstances must be considered. Note that, while counter-intuitive, none of the following non-operational factors is really relevant in making this assessment:
- an entity is a public REIT traded on a national securities exchange;
- REITs are treated as commercial enterprises in the U.S. and included as such in major equity indices such as the S&P 500; or
- a REIT’s income may be treated as operating income rather than investment income for tax purposes.
These may be all true statements but do not, in and of themselves, automatically mean that a REIT is not subject to the PRIIPs Regulation. Instead, the focus must be on the operational and commercial characteristics of the REIT. In the table below, we have summarized general operational and commercial characteristics of typical U.S. exchange-listed equity REITs versus those of a manufacturer of a PRIIP. These characteristics are similar to those relevant to the REIT versus AIF analysis, with status as an AIF being a useful guide for whether the REIT’s shares should be classified as PRIIPs. The two criteria we believe to be most significant to the analysis are highlighted in italics, but no single criterion on its own is determinative.
|TYPICAL U.S. REIT||PRIIP MANUFACTURER|
|A business which acquires, constructs, refurbishes, develops and provides services related to land and buildings||An entity that merely holds property to take advantage of changing market prices or (rental) income streams|
|Corporation having perpetual existence and one or more classes of permanent equity capital||Fund with a pre-defined finite life, often contingent on the investment goals or status of individual investors|
|Substantial number of employees from junior personnel to executive board directors to operate the business. Executive directors are paid at the level of executive directors generally||A largely skeleton staff or no staff at all, with mainly non-executive directors|
|Frequent board meetings at which major business is decided||Infrequent board meetings|
|Little outsourcing of major functions, with appropriate personnel in house to supervise any outsourced activities||Activities frequently outsourced to third parties, including third-party managers and with little ability to supervise outsourced activities|
|Investment policies that may be changed at the board’s discretion||Changes to investment policies normally require some form of investor consent|
|Typically raises capital for itself by itself to fund its development activities, commercial business strategy and commitments||Typically raises capital through a "sponsor" that plans (itself or through a group member) to make a profit out of the management of the capital raised from third-party/external sources|
|Issues debt in the public and private markets that is subject to ratings agencies review||Typically does not widely issue debt securities to the market and does not have rated debt securities|
Whether or not a U.S. exchange-listed equity REIT’s shares are PRIIPs is up to each individual issuer to determine in consultation with its advisors. The criteria listed above are not exhaustive; in any given circumstance there are likely to be additional factors unique to the specific company that may have the effect of making it more or less like a manufacturer of PRIIPs.
Conclusion: Next Steps for U.S. REITs
The implementation of the PRIIPs Regulation requires U.S. exchange-listed equity REITs to assess whether the possible exclusion of their shares from platforms reaching retail investors in the EU warrants an examination of whether they fall within the PRIIPs Regulation. If the REIT’s examination leads it to conclude that its shares are not PRIIPs, then communicating this conclusion and the underlying analysis to EU retail investment platforms could well be a productive undertaking in light of the FCA guidance discussed above.
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Please contact any of the attorneys below if you have questions about the issues raised in this REIT Alert.
 If a security is a PRIIP, the manufacturer (i.e., the issuer) has responsibility for preparing and publishing a “key information document,” or KID, a factsheet outlining features, risks and rewards of the investment which is highly technical and includes the requirement to calculate a summary risk indicator, or SRI. The content of a KID is strictly regulated and it must be kept up-to-date throughout the life of the product. A PRIIPs distributor has responsibility for delivering the KID to a retail investor before the transaction is concluded. A KID is required before the PRIIP is “made available” to a “retail investor” in the EEA, which we understand has led a number of European investment platforms to block investors from purchasing shares of U.S. exchange-listed equity REITs because there are no KIDs on file. Penalties for noncompliance are harsh.