"When it comes to real estate investment, not all products are the same; sometimes you have to be wary of appearances, as they can be misleading. "This is the observation made by Sylvie Proia, CEO of Unik Capital Solutions, the Luxembourg-based real estate investment company. Sylvie has more than twenty-five years of experience in professional real estate investment and as many adjustments and refinements to her approach, guided by her careful listening to the market. She has launched several real estate investment products and has met with great success. Beyond the invested assets, Sylvie's main focus is the professional investor(1), the partner who trusts her, providing her with the necessary capital to bring any project to a successful conclusion. With this objective in mind, in 2018 she and her team in Luxembourg decided to create her real estate development structure in the form of a S.C.A. in Luxembourg. (a limited partnership limited by shares) dressed in all the substance applicable to AIFMD (Directive for the Management of Alternative Investment Funds) alternative investment funds. Sylvie explains the approach through a comparative look at the different products on the market.
"When you read the press, you notice that for several years now, the Club Deal Immobilier seems to have had the wind in its sails", relates Sylvie. Sometimes compared to real estate crowdfunding, the Club Deal Immobilier was born from the initiative of a real estate developer with a good track record, who brings together a number of private investors, generally from two to a few dozen, to collectively acquire one or more properties. The target properties are identified at the outset, making it possible, in theory, to better define the potential return and associated risks. Within the shareholders' agreement represented by the Club Deal, this developer positions itself as a "General Partner" (GP). It is the GP who is contractually entrusted with the entire execution of the Club Deal project(s), investment transactions, development of the assets, their administration and final resale. The other investors, called "Limited Partners" (LP), have no other role than to provide the financing at the beginning and to receive the fruits of the project at the end. During the course of the project, they may receive periodic reporting, the quality of which varies according to the pre-established contractual conditions. The operating scheme is set out below.
"At the start of the project, the Promoter presents a forecast balance sheet for the operation showing a projected return", explains Sylvie. At the end of the promotion cycle, i.e. five to seven years later, the same Promoter presents an actual balance sheet and the company's results. It is not uncommon for actual results to be significantly lower than initially forecast," notes Sylvie. "What is the reason for this? Not just market conditions. Indeed, throughout the duration of the shareholders' agreement, the Promoter, as the sole master on board, unilaterally makes all the decisions concerning the management and administration of the property. He incurs costs that will impact the overall performance of the project, without subjecting his management actions to any supervision or arbitration whatsoever. It may happen that this lack of any governance in the management may lead to some overspending in the allocation of costs", Sylvie deplores. "Here, the shareholders, even if injured, have no recourse".
So how can we do better in terms of investor protection, in a vision of value creation around real estate investment? "AIFMD has brought a lot to real estate investments in terms of governance, by making possible the dressing of a real estate S.C.A. as an AIF, in order to benefit from a management and a risk control in line with an increased protection of the capital provider", appreciates Sylvie. "This is how we have designed our structure dedicated to property development". In the scheme of such a real estate investment vehicle, the initiator creates a S.C.A. dressed in the AIFMD legal and regulatory framework. The structure's prospectus is not only contractual between the parties involved, it is validated by the regulatory body, the CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg. The Limited Partners invest directly in the company, the S.C.A. and become shareholders. The operating scheme is summarised below.
Through the governance applied to this structure under AIFMD, all the management decisions of the initiator are controlled before being validated by the AIFM (the management company). The latter sits on the investment committee. In the same way, all issues related to the control of capital inflows and outflows, the KYC ("know your customer") / KYT ("know your transaction") reviews are carried out by the Transfer Agent, a dedicated professional body that is also subject to prudential supervision. Finally, the custodian bank ensures the safekeeping and security of the assets. Its activity of controlling the valuation of the assets, which is based on the external valuator, an undisputed professional reference on the market, guarantees their real and fair valuation. Finally, it permanently supervises the entire management process.
"The protection of professional investors is ensured by all of these specialised bodies involved in the supervision of capital, the AIFM, the transfer agent and the custodian bank," summarises Sylvie. "Take the AIFM, for example, through its triple role as head of risk management, portfolio management and member of the Investment Committee, it carries out supervision that starts upstream of the project and continues throughout the investment cycle," explains Sylvie. "Indeed, her task begins with an in-depth analysis of the projected balance sheet, a dissection of the future valuation assumptions used and an analysis of the targeted properties. Like UCITS funds, for example, she carries out a sort of pre-trade compliance check to verify the suitability of each planned transaction with the prospectus, its consistency with the management objectives and the way in which the transaction is structured. Finally, it ensures that the price agreed corresponds to the market. Each purchase, each expense incurred", relates Sylvie, "is validated by three separate signatures, which materialise the scrupulous controls carried out by each of the signatories, who are experts in their field of activity. This is a far cry from unilateral free will". This governance acts as a permanent backdrop. Each year, the balance sheet of operations is analysed by the supervisory bodies, and the yield forecasts are adjusted and corrected before being formally communicated to professional investors. The S.C.A.'s annual accounts, in accordance with AIFMD, are audited by a "Big-4" firm that reviews and validates the valuation methods of the properties in the portfolio.
Finally, for the professional investor, what is the cost of this substance and what are the other benefits, apart from the protection provided by the AIFMD regulatory framework, of investing in real estate through such a vehicle? "Obviously, this supervision has a cost," observes Sylvie, "insofar as the various participants have to be remunerated, but these costs are known in advance and fully controlled. There is therefore no room for unjustified fees or commissions that would be detrimental to professional investors".
In addition to this cost control dimension, there are other unavoidable aspects that appeal to professional investors who choose our structure to access real estate development projects. "First of all, there is the Luxembourg market, which we have favoured. Basing our analysis on more than two decades of experience in the various property markets in Europe, we have chosen to invest exclusively in Luxembourg," confides Sylvie. "This market, like those favoured by venture capital, is stable and has a good depth that limits the risks of investment. It is a really buoyant market, where our team, in particular my partner Christoph Tunkl through his network, has access to particularly interesting offmarket opportunities". Then there is our management approach, which focuses on experts who thrive in their field of expertise and which allows us to optimise returns. "The structure, launched in July 2018, had already made three acquisitions by December 2018," says Sylvie.
"Within this period of time, and in relation to the price deed in hand, all acquisition costs have already been incorporated into the valuation. Despite this, the valuation at the end of 2018 remained virtually stable compared to the launch of the structure, whereas market standards would have anticipated a significant decline in the value of the share in such a configuration over the first few months of activity. At the heart of our business, we strive to control the entire chain. Following this approach, for the sale of assets, we have also internalised a structure dedicated to sales, which shares our inescapable values of ethics, listening to the market and skills". Collaterally and for its professional investors, this real estate investment vehicle has all the characteristics that make it eligible for the reuse of corporate disposals, which contributes to making it a flagship product in the company's range of real estate investment solutions.
To date, the real estate investment vehicle continues to grow at a sustained pace. In the first half of 2019, it has three new assets in the process of being acquired for conversion and property development, including a project to build a four-star hotel with more than 100 rooms. To achieve such dynamism, does one have to be a visionary in the real estate investment market? "Not necessarily," insists Sylvie Proia, before adding, "this solution is the result of listening to strong market demand in terms of product, structuring, governance and management quality. Finally, this vehicle completely reflects the way Unik Capital Solutions works, but also our way of operating and reacting to the expectations of our professional investors and partners. This approach in the development of solutions and day-to-day governance is the essence of our differentiation".
1) The proposed investment solutions are strictly reserved for professional investors (by nature, size or option), in accordance with Luxembourg law, French law excluding any US national.