Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) was formally adopted in 2022, marking the beginning of a new era in corporate sustainability reporting. The new CSRD applies to a drastically larger scope of companies (about 50,000 more than under the previous Non-Financial Reporting Directive) across all sectors, including the real estate sector.

The European Financial Reporting Advisory Group (EFRAG) was designated as the technical advisor to the European Commission, tasked with developing the European Sustainability Reporting Standards (ESRS) for application by all companies governed by the CSRD. These standards encompass a broad spectrum of environmental, social, and governance (ESG) issues, including climate change, biodiversity, and human rights. They aim to furnish investors with crucial information about the sustainability impacts of the companies in which they invest. The Commission adopted the ESRS framework in July 2023, while the CSRD rules began to apply gradually from 1 January 2024.

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EREF does not take positions on regulatory issues. However, many participating organisations have developed their own positions. To learn more, please view the individual participating organisations' websites.

European Long-Term Investment Fund Directive

ELTIF 2.0 aims to enhance European Long-Term Investment Funds (ELTIFs), managers of which have a pan-European passport for marketing to professional and retail investors. Effective from 10 January 2024, revisions include increased asset flexibility, simplified definitions and adjusted borrowing limits, emphasising long-term investments in sectors such as real estate and infrastructure. Marketing requirements are refined, introducing a suitability test for retail investors and transparent disclosures.

ELTIF 2.0 also broadens eligible real assets, including real estate. It enhances flexibility for ELTIF managers by allowing investments in related vehicles and team co-investments. Diversification rules are eased, and a redemption mechanism is introduced, addressing limitations and promoting long-term project investment.

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EREF does not take positions on regulatory issues. However, many participating organisations have developed their own positions. To learn more, please view the individual participating organisations' websites.

Real estate investment trusts

Real estate investment trusts (REITs) are publicly listed property investment companies that own, operate, develop, and manage real estate assets for obtaining returns from rental income and capital appreciation. REITs are open to both retail and institutional investors. Up to now, REIT frameworks have been implemented in fourteen European countries, encompassing 13 EU member states and the UK.

Due to the legal requirement to distribute most of that income annually, REITs do not pay income tax on income related to immovable property that is so distributed, ensuring a single layer of taxation in the hands of the investors.

Despite common features, there may be differences between countries as regards how REITs are structured and how the tax exemption of the income is provided. In some countries, REITs were developed using the tax rules generally applicable to trusts and companies; in others, a specific REIT tax regime has been adopted.

Due to these differences and the potential for fragmentation, continuous efforts are being made to harmonise and facilitate the coexistence and success of these regimes.

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EREF does not take positions on regulatory issues. However, many participating organisations have developed their own positions. To learn more, please view the individual participating organisations' websites.

Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation (SFDR) was adopted in November 2019 as part of the EU’s Action Plan on Sustainable Finance. It aims to address a perceived lack of transparency and objectivity on how institutional investors, investment managers and financial advisors consider sustainability aspects in their investment decision making.

SFDR significantly impacts investors, asset managers and advisors in real estate investment funds. Classifications of investment funds under Articles 6, 8, and 9 (6 being less ‘green’, and 9 more ‘green’) are designed to prevent greenwashing and protect against misleading investors. The SFDR also introduces entity-level disclosure, including the PAI statement, obliging companies to consider adverse sustainability indicators, encompassing real estate asset aspects such as exposure to fossil fuels and energy-inefficient properties. For real estate investment funds, the failure of SFDR to accommodate transition strategies has been a major challenge.

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EREF does not take positions on regulatory issues. However, many participating organisations have developed their own positions. To learn more, please view the individual participating organisations' websites.

Directive on the Taking-up and Pursuit of the Business of Insurance and Reinsurance

Solvency II creates a single market for insurance services in Europe and harmonises the capital adequacy requirements of European insurers since 2016.

Research shows that the Solvency II standard model SCR for real estate does not reflect the actual volatility of real estate investment across Europe. This fact has been raised in meetings with policy makers in the European Parliament, Commission and Council, as well as EIOPA (European Insurance and Occupational Pensions Authority). It has also been addressed in many EREF members’ relevant regulatory consultation responses, including the Capital Markets Union, which is focused on removing obstacles created by EU financial regulations and increasing long-term investment in Europe.

The review of Solvency II launched in 2021 did not include proposals to change the SCR for real estate or to expand the matching adjustment eligibility. However, the criteria to qualify for the long-term equity SCR, which reduces the requirement from 39% to 22% for inter alia REITs and property companies, will be expanded.

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MSCI Solvency II update report (Mar 2017)
Summary: This report offers a detailed review of the Solvency ll risk based regulatory framework proposed for defining insurance company capital adequacy. The study focuses specifically on real estate and was funded by a consortium of six key trade bodies, each supporting an aspect of insurance company investment in property and more broadly.