OUTSOURCING RULES A CHALLENGE FOR GERMAN MANAGERS OF REAL ESTATE FUNDS WITH CROSS-BORDER INVESTMENTS
When managing real estate funds with real estate exposure in other countries, alternative investment fund managers (AIFM) in Germany often require the assistance of external service providers (such as appraisers and asset or property managers) in relation to these outbound investments. The reasons are manifold and include the relevant AIFM not having sufficient knowledge of the foreign real estate market or just lacking any presence abroad in order to administer the premises. In these instances, foreign property managers can provide a valuable benefit as an experienced and well networked local player. It is hard not to see that such delegation of tasks may mitigate risks and costs for the AIFM and its alternative investment fund (AIF), not only with regard to cross-border investments.
In connection with the implementation of the AIFM Directive (Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers) into German law, the outsourcing rules which are applicable to managers of German real estate funds pursuant to the German Capital Investments Code (Kapitalanlagegesetzbuch) have also been revised. Together with recent announcements from the German regulator BaFin, they have significantly increased the requirements for an involvement of external service providers in the management of a real estate fund’s assets.
Scope of outsourcing rules
In accordance with Article 20 of the AIFM Directive, German managers of real estate funds who intend delegating manager duties to third parties (outsourcing) are required to notify BaFin of its plan before the relevant delegation arrangement becomes effective. Different to the situation before the implementation of the AIFM Directive in Germany, the outsourcing rules not only apply to a delegation of ‘essential’ duties but rather comprise almost all functions which have to be carried out by an AIFM managing a fund under the AIFM Directive.
While one would primarily think of a delegation of portfolio management services when determining the functions to which the outsourcing rules apply, BaFin has clarified that in connection with the management of real estate funds, other administrative services related to the fund’s real estate assets trigger an application of the German outsourcing rules. As a result, German managers of real estate funds have to cope with a wide scope of potential outsourcing scenarios under German investment law.
Oct-Dec 2015 Issue
King & Wood Mallesons