31 Jan 2018
The EU MiFID II changes apply from 3 January 2018. Intermediaries who act for investors in institutional unlisted real estate funds need to plan for the changes and should review their policies and processes for executing client orders in the context of secondary trade sales and purchases. Intermediaries include investment firms acting on a discretionary basis or on a non-discretionary basis including brokers or other providers of execution-only services.
 
When executing transactions, firms are required to demonstrate that they have taken “all sufficient steps” – a higher standard than the current “all reasonable steps” criteria – to obtain the best possible result for their clients, taking into account the execution factors. The execution factors are: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.
 
When the funds are unlisted, seller/buyer representatives would typically explore execution options offered by the fund manager: for instance subscription and pre-emption events, redemption windows, matched bargains (where the manager directly matches buyers with sellers). “All sufficient steps” raises the best execution bar: it obliges such investor representatives to consider alternative venues to execute a client order. If the fund units are tradeable on platforms – commonly known as ‘the secondary market’ - there may be the prospects of achieving a better result via this secondary market.
 
The secondary market for units in institutional unlisted (open and closed-ended) funds – holding underlying UK and European real estate – has grown significantly in recent years with an estimated £2bn (USD 2.66bn) traded in 2016.
Seller and buyer representatives, who operate within MiFID investment firms, should have regard to opportunities presented by the secondary market. The new obligation to demonstrate “all sufficient steps” has been taken to achieve best execution under MiFID II.

Author

Melville Rodrigues

Melville Rodrigues

Head of Advisory – Real Assets, Apex Group

Melville's practice focuses on the launch and operation of funds, including funds which hold underlying real estate investments in the UK as well as internationally. The funds have attracted institutional, private and retail investors.

In addition to servicing clients, he has been involved in representing industry bodies in their dialogue with the Treasury and the FCA. He is a regular contributor to the real estate press.