08 September 2016
A Cyprus Alternative Investment Fund (“AIF”), established, regulated and licensed in accordance with the Alternative Investment Funds Law 131(I)/2014, as amended, may well be an ideal structure through which to set up a Cyprus real estate fund whose investment portfolio will be comprised by rental properties and whose units will be offered predominantly to foreign real estate investors.
The features of an AIF potentially give prospective investors of Cyprus real estate considerable advantages over direct investment. Investment in a portfolio of properties offers diversification and thus mitigates investment risk. Additionally, given foreign investors are not experts in the local real estate market, prospective investors will benefit from the know-how and experience of an appointed manager, who should carry local expertise and who will be responsible for property purchases, sales and construction. What is more, especially in terms of rental property, there is a considerable administrative burden which foreign investors prefer not to undertake, and which If undertaken centrally by the fund or an appointed property manager there will be both efficiency, by economies of scale, and ease of mind to investors. In addition, the fact that such structures are licenced and regulated, have custodians, auditors, lawyers, bankers and designated managers, who may themselves be licenced and regulated, gives a credibility to the investment proposal which may serve to alleviate skeptical investor concerns of foul play by developers, real estate agents and other industry stakeholders. The fact that investment is in shares and not directly in property also facilitates the process of investment and, generally speaking, the exit. Investment in such a scheme should also be a valid investment for the purposes of obtaining a Cyprus passport through the very popular naturalization by exception program.
In practice, investors will participate by purchasing units or shares in such a Cyprus real estate fund, in accordance with the term of offering, and will have a return on their investment, either in the form of appreciation of the share value or periodic dividends, generated by a combination of rental income and capital gains of the properties in the portfolio. Subject to minimum subscription periods or other applicable restrictions investors will be able to exit either by redeeming their shares for their value, at the time or redemption, or by selling the shares.
Having said the above, and although external economic conditions and trends seems to suggest current times may be ideal for such a Cyprus real estate fund, there are certain variables which need to be diligently examined for such a structure to efficiently operate. Such variables include the fact that property is an illiquid asset, thus somewhat creating a barrier to exit and the fact that capital gains tax, upon expiry of this year’s exemption, will apply creating logistical complications as to its allocation per property and per investor. For these reasons, and especially given the fact that these structures operate on the premise of investor confidence, any such endeavor needs to be undertaken by specialist lawyers, accountants, tax advisors, administrators and other industry specialists.
For more information, structuring, licensing , legal and administrative support please contact Varnavas Playbell at Varnavas@playbell.com
The information above is not comprehensive and does not constitute legal, tax or regulatory advice.