Pan-European Real Estate Investment and Market Opportunities

Table of Contents

Table of Figures

Table of Abbreviations

1. Introduction
1.1. Motivation
1.2. Thesis methodology

2. Real Estate Investment
2.1. Definition and Characteristics of the Real Estate Market
2.1.1. Definition of the Real Estate Asset Class
2.1.2. Characteristics of the Real Estate Market
2.2. Forms of Real Estate Investment
2.2.1. Direct Real Estate Investment
2.2.2. Indirect Investment - Indirect Investment Vehicles
2.3. Closed-end Real Estate Funds
2.3.1. Basic Knowledge about Closed-end Funds
2.3.3. Advantages and Risks of Closed-end Funds
2.3.4. Design of a Closed-end Fund in the U.K.
2.3.4.1. Financial Design
2.3.4.2. Legal Design
2.3.4.2.1. Legal Structure
2.3.4.2.2. Purchase Strategy
2.3.4.3. Fiscal Design
2.3.5. German Real Estate Funds investing in the U.K. – Focus London
2.4. Conclusion

3. Empirical analysis of the Closed-End Real Estate Fund “European Property Investors” L.P.
3.1. Curzon Global Partners
3.2. Basic Principles of the European Property Investors L.P
3.2.1. What is Private Equity?
3.2.2. EPI Fund Profile
3.1.1. Research and Strategy
3.3. Pan-European Market Opportunities
3.3.1. Introduction
3.3.2. The “Great Exchange”- Real Estate Externalisation
3.3.3. European Real Estate Market Dimensions
3.3.4. European Cross-border Real Estate Purchasing Activity
3.3.5. European Real Estate Capital Markets at a glance
3.3.6. Interview
3.4. Pan-European Investment Strategy
3.4.1. Investment Profile
3.4.1.1.Outsourcing Transactions
3.4.1.2.Sale and leaseback Transactions
3.4.2. Portfolio Strategy – Pan- European Diversification
3.4.3. Acquisition and Purchase Strategies
3.4.3.1 Due Dilligence
3.4.3.2 Lease Structures and Terms in the respective countries
3.5. Outlook: Investment Opportunities in Central and Eastern Europe
3.6. Final Conclusion

Table of Figures

Figure 1: Economic Forecast

Figure 2: European Transparency Index

Figure 3: European Direct Real Estate Investment

Figure 4: European Direct Real Estate Investment according to countries

Figure 5: Regional Investment and Risk Category

Figure 6: Risk Category and Gearing

Figure 7: Breakdown of vehicles by target sector

Figure 8: Schematic representation of Indirect Investment vehicles

Figure 9: Number of Closed-end Funds

Figure 10: Investment in U.K

Figure 11: Risk Categories

Figure 12: Annual European Private Equity Investment

Figure 13: Public Company Target List - 1st step

Figure 14: Qualifying the Short List - 2nd step

Figure 15: Ranking the Short List - 3rd step

Figure 16: Regional Composition of World GDP

Figure 17: Real Estate Externalisation Transactions by country

Figure 18: Total population change in the world and the EU-15

Figure 19: Europe’s changing demographics

Figure 20: Pension payments and contributions as a percentage of GDP

Figure 21: European Commercial Real Estate stock- End of 2003

Figure 22: Total Commercial Real Estate stock by country in 2003

Figure 23: Total Investment Turnover in 1st half of 2005

Figure 24: Cross-border Purchases of European Real Estate by location

Figure 25: Cross-border Real Estate Purchasing Activity by Investor Nationality

Figure 26: Acquisitions by Purchaser Nationality

Figure 27: Total Investment in Italy from 2000- 2004

Figure 28: Origin of Capital invested

Figure 29: Investments by Italian Property Funds

Figure 30: European Yields 1st quarter 2005

Figure 31: Offices- Investment volume Madrid& Barcelona, 1st quarter 2005

Figure 32: Real Estate Externalisation Transactions 1999 - 2002

Figure 33: Real Estate Externalisation Transactions 2003+

Figure 34: Variance

Figure 35: Factor Model of Heston and Rouwenhorst

Figure 36: Absolute Deviation

Figure 37: Number of Properties

Figure 38: Country, Sector and Regional Coefficients: 1996-2002

Figure 39: Measures of Relative Importance

Figure 40: Target List

Figure 41: Short List

Figure 42: Sector Composition

Figure 43: Lease Market 2005

Figure 44: CEE Investment Activity by year

Figure 45: Investment volume within the CEE States

Figure 46: Gross Domestic Product in Central and Eastern Europe

Figure 47: Investment Activity by Nationality (2004)

Figure 48: Economic Indicators

Figure 49: European Real Estate Externalisation Potential by country

Table of Abbreviations

illustration not visible in this excerpt

1. Introduction

1.1. Motivation

“However, knowledge remains to be knowledge as long as it is not practised. Wisdom, on the other hand, is gained but of practice and stays with the individual.“ ^[1]

Masaaki Imai

The significant meaning of studying is gaining knowledge. This is in fact true but all theoretical knowledge should be completed with a practical relation.

Accordingly, we thought objectively about how we could succeed in combining both parts.

During the last four years we experienced an extensive overview about the wide field of Real Estate Economy. With this conclusional thesis we want to specialise on the part that we consider to be the most interesting sector of Real Estate Economy – Real Estate Investment Management.

Institutional investing has become increasingly important what involves that Real Estate as an asset category has become more and more interesting for prospective investors- whether direct or indirect.

As our empirical analysis targets an indirect Investment vehicle, we are examining this sector in detail. Furthermore, in times of increasing internationalisation, our intention was to illustrate the Pan-European relations and collaboration. Accordingly, our main focus lies on Pan-European Investment that became very attractive for investors within the last few years and will have great impact on the future Investment market.

We concentrate our thesis on a special Closed-end Fund, the European Property Investors L.P. which is specialised on Cross-border Investment and Real Estate Externalisation by custom tailored sale-and leaseback transactions.

We have chosen this Fund due to the current relation to important market developments occurring with this specific outsourcing phenomenon.

The formation of the European Monetary Union and the attendant fiscal requirements of EU membership have put particular pressures on member states to reduce government deficits, restructure their balance sheets and improve their financial situation by privatisation. Thus, governments arguably need to conduct a wider review of core and non core activities. Selling Real Estate properties, which are not necessary for their operating business, is a quick way to raise cash in order to reduce deficits.

Renting rather than owning enables governments as well as companies to avoid illiquidity and outsource their Real Estate Management in order to refocus on their core business.

We were given the chance to implement our project with Curzon Global Partners, an Investment Management company based in London. This was an opportunity to work with a representative of successful Pan-European Real Estate Investment.

We were able to analyse and explore the Investment process as well as the Pan-European markets directly at source.

Herewith we want to thank Mr. Ric Lewis, Senior Managing Director and Chief Investment Officer of Curzon Global Partners for giving us the possibility to get an insight in a highly sophisticated Investment Management team.

Furthermore, Mr. Andrew Hook, Associate Director of Strategy and Research as well as Mr. Benny Widerker, Investment Associate, were a great support for us during our internship.

1.2. Thesis methodology

The thesis is divided into three parts with each part building on the previous one.

We want to bridge the gap between theory and practice and combine these two sides in a reasonable way whereas we mostly concentrate on the practical chapter.

Part 1: Introduction

This part aimed to provide a basic idea on our motivation and was supposed to give a general background comprehension about the specific contents of our thesis.

Part 2: Theory of Real Estate Investment

This part gives a formal and theoretical introduction to Real Estate as an asset class, direct and indirect Investment as well as Closed-end Real Estate Funds.

It should provide a roughly overview about some basic principles and key facts. Furthermore, the legal and fiscal framework for the practical application is described.

This chapter is consciously stated in brief because our explicit emphasis lies in the practical and descriptive Part 3.

Part 3: Empirical Analysis on the European Property Investors L.P.

The theory covered in Part 2 provides the basis for understanding the actual most important chapter of the thesis- the analysis of the Market Opportunities and the Investment Strategy of a Pan-European Investment vehicle such as European Property Investors L.P.. Furthermore we analyse the arising Investment opportunities within the new member states of the European Union in Central and Eastern Europe although EPI is not yet investing in this region.

2. Real Estate Investment

2.1. Definition and Characteristics of the Real Estate Market

2.1.1. Definition of the Real Estate Asset Class

When looking at Real Estate from an economic viewpoint, questions like “How efficiently is my property used?” and “How can its performance be measured?” gain priority.

A property can be regarded from an Investment and a production angle. In Investment terms, properties are capital Investments or non-financial assets. The latter viewpoint focuses on a property as a production factor.^[2]

James A. Graaskamp describes a property from the Investment view as a product of artificially divided space and an institutional time dimension designed to connect the society with the natural resource of ground and land.^[3] Integrating the time dimension, a property can be divided into time-space units by leaving the property to a third party for a certain period of time. If the user pays a fee for this usage, a money-time unit is created. Graaskamp and Pyhrr described this relation as “Real Estate is space and money over time.”^[4] This fact transforms a property into an asset which can be used over a certain time period and thereby produces a beforehand agreed cash flow or profit.

2.1.2. Characteristics of the Real Estate Market

In the past, mainly shares, bonds and cash were considered in asset allocation decisions, while Real Estate have played a minor role, because return especially in Germany was relatively low and has made this asset class unattractive for most Fund managers. However, the improvement of market fundamentals, the increase of Real Estate returns and the establishment of European Real Estate indices have made Real Estate a more mature and active Investment vehicle over the past few years.^[5]

As an example, the total commercial Real Estate stock in 20 European Countries examined by DTZ was approximately €5.9 trillion at the end of 2003.^[6]

Thus, analysing the characteristics and specific features of Real Estate is important for the classification of Real Estate as an asset class and its positioning among others. Furthermore, the determination of e.g. tradability, liquidity or risk profile of a certain asset has important implications on strategic Investment decisions.

In the following, these specific characteristics of Real Estate will be determined and shortly described.

Immobility

The most obvious feature of Real Estate is the fact that it is tied to a particular place. Thus, the location substantially determines type and degree of utilisation and thereby its economic use. Due to this immobility, the property can not elude from this determinants by simple replacement into another market or country.

The factors related to a special location can be subdivided into micro and macro factors. Micro factors are characteristics of the property itself and the close-by neighbourhood whereas the image of the region, the political climate etc. are the so-called macro factors. These factors can be of hard or soft nature.

In the long run, property may be affected by changes of these parameters.

Therefore, these are very important items concerning an Investment decision. For an investor with a low risk profile it may be of increased importance that occurring political or structural changes will not substantially affect the use of the property.

Heterogeneity and Market Transparency

Real Estate is a global business today. Once dominated by local competitors, markets throughout the world now attract a range of international investors, lenders, occupiers and developers seeking cross-border opportunities that offer optimal Investment returns.

Measures that track the transparency of overall business environments, political risk and financial systems are currently available in most global markets.

But information regarding the transparency of Real Estate markets has been harder to come by due to the natural heterogeneity of any Real Estate asset being traded on an exchange.

Figure 1: Economic Forecast

illustration not visible in this excerpt

Source: Henderson Global Investors (Editor), “European Investment Context”, June 2005, Page 3

Therefore, instruments like e.g. Real Estate indices were developed to deal with this specific characteristic of Real Estate and establish a platform for performance measurement and comparison. Thus, these indices made an essential contribution to transparency which in turn is fostering globalisation.^[7]

Jones Lang LaSalle and La Salle Investment Management as an example introduced the first Global Real Estate Transparency Index.

Designed to help Real Estate players to understand local market dynamics, the Index seeks to characterise the relative transparency of key global markets and can be a useful device for analysing the risk profiles of national, regional or global property markets.

Figure 2: European Transparency Index

illustration not visible in this excerpt

Source: Jones Lang LaSalle (Editor), “Global Real Estate Transparency Index 2004”, Page 10

But nevertheless, Real Estate Investments are treated with a high level of discretion. The terms of contract or even the price paid in acquisitions are seldom made public.

However, this is mainly the case in Germany. In the United Kingdom e.g. Real Estate transactions are more often disclosed to the public and therefore data for property valuations are available.

“At this point in their evolution, opportunistic Real Estate Private Equity Funds are under increased scrutiny from investors and their advisors seeking greater transparency and standardization in reporting information” said Deborah Levinson, a Partner in Ernst &Young’s New York Office.^[8]

Good performance, improving transparency and more liquidity boosted European direct Real Estate Investment in 2004 to €95.6 billion, 7% higher than 2003 and 50% up on 2000.^[9]

Length of production process

The production process for buildings and property is normally very time intense not only due a long time period of construction but also because of the time intensive planning phases, including e.g. applications to public authorities, negotiations for acquisitions and marketing. These stages increase with the size of the project.

Smaller projects with a volume of up to €10 million normally take up 18 to 30 months, middle size projects up to €50 million take around 24 to 42 months and bigger projects take up to 70 months. Approval proceedings in normal cases take more or less 6 to 10 months regardless of the project volume.^[10]

Slow market adjustments

The two above described characteristics of Real Estate result in a market that reacts very slowly to changes in supply and demand. If, due to any reason, the demand increases rapidly, the market can experience a shortage.

This situation will normally remain for a longer period of time because the long construction process is responsible for the very slow way the market can adjust the supply. Due to the high demand, prices for this type of property will remain at a high level in the meanwhile. The same applies in case of an oversupply, when prices in this segment will then fall until the demand has consumed the over supply and the market is back in balance.

This phenomenon is called “time-lag”, which is responsible for the fact that project developments as well as Investment decisions underlie a relatively high economic risk and results in the cyclical variations of market forces like supply, demand and vacancy.

Investment volume

Investing in Real Estate as an asset class is just possible for natural persons or institutions in disposition of a high amount of capital. Direct as well as indirect Investment vehicles, such as e.g. Investment Funds are often restricted to a minimum of Investment capital. Thus, an Investment decision is always of great value what makes it very important to analyse the specific features of Real Estate and therefore its risk and return potential. Cross-border purchases of European commercial Real Estate, as an example, totalled €54 billion in 2004.^[11]

High level of transaction costs

High Investment volumes mostly result in a high amount of transaction costs due to factors like notary fees, land transfer taxes, marketing costs, high information and research costs caused by low market transparency etc. which can easily add up to 5 -10% of extra cost in Germany. That is the reason why Investments in Real Estate are usually made based on a long term perspective and unlike to shares or bonds not on short term speculative motives.

2.2. Forms of Real Estate Investment

In this chapter, we examine flows of equity capital into Real Estate with special focus on cross-border Investment.

Whenever an investor decides for an Investment form, several key factors prove to be of importance in the decision making process. These are mainly tax reasons, legal structures, control rights, planned holding period and liquidity, motives and volume of the Investment.

We begin, for context, by examining direct Investment in Real Estate.

Finally, we examine the continued growth of the private vehicles market, highlighting the creation of Funds and vehicles aimed at attracting the capital of individuals as well as institutional capital.

2.2.1. Direct Real Estate Investment

The direct acquisition of properties is the traditional form of Investment. If a natural or legal person acquires a property, it is classified as a direct Investment if there is no third person or legal form in-between the investor and the property.^[12]

The main advantage occurring with direct holdings is the personal control that the owner has over the property and all Investment and management decisions.

If the property is not used for own purposes but is income producing, such as apartments or buildings in the office, warehouse or retail sector, the investor must be involved in the management of his property.^[13] In order to avoid this assignment, the property management can also be outsourced. However, major decisions affecting the property such as repairs, expenditures, rent rates etc., must still be made by the investor.

Holding Real Estate directly, especially commercial Real Estate is not suitable for every type of investor. These Investments usually require a time horizon of between five and ten years with a high capital commitment.

Two studies of empirical data provide a measure of actual direct Investment holding periods for institutional investors. Collett & Lizieri & Ward and Fisher & Young report that in recent years the average institutional holding periods for properties located in the United Kingdom, respectively, are slightly less than eight years.^[14]

The property industry has made much of the strong and consistent performance of Real Estate compared to the other asset classes in recent years.

According to Jones Lang LaSalle, European Direct Real Estate continues to perform well relative to other mainstream Investment assets in 2005.

Furthermore, many people do not longer limit their Investment horizon to the borders of their own country. New transport and communications media, the political stability and integration of Europe, cross-border activities, continuing stays in foreign countries and the acquisition of Real Estate abroad are an expression of this trend.^[15]

The ongoing integration of the European Union, in particular the free movement of capital as well as the single European currency, has made its contribution to the growing trend for Real Estate cross border acquisitions.

Figure 3: European Direct Real Estate Investment

illustration not visible in this excerpt

Source: Jones Lang LaSalle (Editor), “European Capital Markets Bulletin, First Half 2005”, Page 8

Figure 4: European Direct Real Estate Investment according to countries

illustration not visible in this excerpt

Source: Jones Lang LaSalle (Editor), Pan-European Index Launch, “Investing in European Real Estate”, Page 8

The graphs show, direct Real Estate Investment of €47.9 billion was recorded for Europe in the first half 2005, 4% higher than the same period in 2004, as strong risk-adjusted performance and positive yield gaps encouraged investors.^[16]

On average over the past five years, direct Real Estate has been Europe’s best performing mainstream Investment asset.

The acquisition and ownership of Real Estate in foreign countries also raises legal and tax issues. As value maintenance and capital growth as well as aspects of tax and inheritance law will play a fundamental role, it is important to clarify these key framework conditions before acquiring Real Estate in order to be protected from unexpected legal and tax consequences.^[17]

The following aspects are essential to take into consideration:

- Real-estate transfer taxes such as e.g. stamp duty
- Annual Real Estate taxes
- Capital gains and other taxes upon the re-sale of the property
- Legal System – special restrictions or premises for Real Estate acquisition by foreigners

2.2.2. Indirect Investment - Indirect Investment Vehicles

Indirect property Investments are always managed by a legal entity which is in between the share- or Fund-holder of the property.

In contrast to direct Investment, an investor does not acquire Real Estate assets themselves but a share in a property company that holds the assets. Indirect Investment offers a range of advantages which comprise the special market knowledge of the Investment company, the externalised management of the assets, tax advantages, etc.

Furthermore, indirect Real Estate assets offer high liquidity and allow the investor to better allocate his Investment regarding his Investment volume and the distribution of available capital.^[18]

In general, the structure of indirect Investment vehicles is attractive to private as well as institutional investors due to their unregulated status - there is no legal basis - and high level of flexibility to meet investor needs.^[19]

European Indirect Investment market – Focus U.K.

The European indirect Investment market has undergone a period of rapid development in recent years, with significant growth in the volume of available capital, increased acquisition activity and a wider range of vehicle structures and strategies available to investors than ever before.^[20]

Regarding the developing property market in the U.K., market efficiency is enhanced by the diversity of vehicles and products that enable investors with different preferences to find appropriate Investment opportunities.

However, this diversity creates problems concerning transparency and availability of market intelligence especially in the commercial market sector.

Therefore, the quality of information has improved immeasurably, with the work of Oxford Property Consultants Private Vehicles Database, INREV, IPD and ABN-AMRO inter alia.^[21]

These organisations have undertaken research in the field of the indirect Investment market, analysing the views of investors, managers, and advisors within the market.

Concerning tax efficiency and transparency, the majority of those questioned regarded all indirect Investment vehicles as tax efficient and mainly transparent.

Specialist management (and the perceived out-performance that goes with specialisation) was also seen as the key driver of growth in the indirect Investment market.^[22] Those aspects are, as aforementioned, the main advantages in comparison to direct Investment.

Disadvantages that can be mentioned include the lack of an established secondary market and the incertitude about the market prices.^[23]

Main attributes of the indirect Investment vehicle market over the last five years include a growth in Pan-European vehicles and, additionally, a change in Investment manner from comparatively conservative, low gearing Core Funds to more aggressive, highly geared Value added and Opportunity Funds which is shown by the following graphs.

Figure 5: Regional Investment and Risk Category

illustration not visible in this excerpt

Source: Oxford Property Consultants (Editor), “Indirect Property Market in Europe”, July2005, Page 3

Figure 6: Risk Category and Gearing

illustration not visible in this excerpt

Source: Oxford Property Consultants (Editor), “Market Statistics 2005”, Page 4

U.K. Real Estate vehicles remained predominantly focused by sector and/or target location: the OPC database suggests that only around 36% of vehicles launched in 2001-2003 were diversified.^[24]

The following graphic shows that this has changed remarkably until 2005.

Figure 7: Breakdown of vehicles by target sector

illustration not visible in this excerpt

Source: Oxford Property Consultants (Editor), “Market Statistics 2005”, Page 5

Indirect Property Investment in the U.K. is generally undertaken through employing one of the three legal formats.^[25]

- Partnerships
- Unit trusts
- Property Companies

Generally speaking, these formats can be seen as having the same basis in terms of size, trading volume, number of investors and regulatory framework.

Figure 8: Schematic representation of indirect Investment vehicles

Source: According to Kutsch, N. / McAllister, P. / Newell, G., “Private Property Vehicles: the valuation of interests in Limited

Partnerships”, ERES Conference Dublin (Editor), June 2005

This figure shows that indirect Investment vehicles can range from joint ventures – vehicles with two or three investors pooling money and know-how for a certain time span and a clearly defined asset base – towards property companies listed on the stock exchange with a high number of investors and a large portfolio of assets.^[26]

As we specialise our thesis on Closed-end Funds, we only want to examine the Limited Partnership form in the following part, which is the general legal form of a Closed-end Fund.

2.3. Closed-end Real Estate Funds

In terms of our empirical analysis we want to inspect Closed-end Real Estate Funds in the U.K. as a form of indirect Investment. The following parts comprise the basic information, conveniences and downsides of Closed-end Funds and furthermore the design in terms of legal form, tax considerations and financial possibilities and regulations.

2.3.1. Basic Knowledge about Closed-end Funds

“A Closed-end Fund (CEF) is a publicly traded Investment company registered under the SEC Investment Company Act of 1940. Capital is typically raised through an initial public offering (IPO), as for any public company; the proceeds are invested in securities as determined by the Investment objectives set by the particular Funds charter.”^[27]

A Closed- end Fund is an Investment Fund with a limited number of sharers and a fixed pool of assets. No new sharers are issued after the Fund is launched.

It is a special type of Investment Company that does not continuously offer its shares for sale but instead sells a fixed number of shares at one time with the objective to pool money of institutional or private investors.

The resulting collective buying power of the Fund permits the creation of a well diversified Investment portfolio in accordance with the Fund’s Investment objective and policies which is advised by a professional Investment management.

Thus, Closed-end Funds avoid the problem of unpredictable flows of cash into and out of the Fund. The capital can be invested more fully and long-term oriented.

The Fund is never under pressure to sell shares in order to raise cash for redemptions because the company is not obliged to redeem the outstanding shares. Due to this lack of redemption pressure that could force the Fund to liquidate shares in an unfavourable market environment, it has more opportunity to invest in less liquid securities that offers potentially higher returns.

“Closed-end Fund managers don’t have to sell or purchase portfolio securities during market swings. That enables them remain singularly focused on their Investment strategy.”^[28]

However, the fungibility of Closed-end Fund shares is quite limited.

They can either be sold to a third party over-the-counter or be freely traded on the stock exchange. Thus, a Closed-end Fund is like an individual stock. Sharers are issued through a one-time public offering, which means the first sale of stock by a company to the public. This procedure is called the IPO, Initial Public Offering.^[29]

Closed-end Funds are bought and sold at the market value, which is determined by market forces of supply and demand in the same way a stock is valued.

Thus, the price of a share in a Closed-end Fund is determined entirely by market demand, so sharers can either trade below their Net Asset Value (NAV) at a “Discount” or above it at a “Premium”.

Net Asset Value means the dollar value of a single mutual Fund share, based on the value of the underlying assets of the Fund minus its liabilities, divided by the number of shares outstanding. It is calculated at the end of each business day.^[30]

A Premium or Discount is the amount by which a Fund's market price is greater or less than the NAV, which is expressed as a percentage of the NAV.

A negative number indicates that the Fund's shares sold at a discount to NAV, and a positive number indicates that shares sold at a premium. For example, if the number shown is -10.0, the shares sold at a 10% discount to NAV.^[31]

The formula normally used to determine the actual Premium or Discount is to subtract the current NAV from the Stock Price and divide it again by the NAV.^[32]

Thus, Discounts and Premiums are a function of demand and supply, which in turn are determined by factors such as investor sentiment and a portfolio's performance. Abnormal Discounts and Premiums always represent market inefficiency.

If an investor decides to invest in a Closed-end Fund, he should have a longer Investment horizon and be willing to accept possible price weakness in the event of increasing rates. But Closed-end Funds typically offer more attractive yields relative to comparable products also because of their ability to leverage their assets and because they tend to trade at discounts to their net asset value.^[33]

Only in Germany it is not usual to deal Closed-end Funds at the stock exchange. Here they occur only as Closed-end Real Estate Funds organised as Limited Partnerships.

The European Property Investors L.P. Fund explicit analysed in Chapter 3 is a Closed-end Fund which is designed as a Limited Partnership as well.

The following chart shows the numeric development of Closed-end Funds in the recent years.

Figure 9: Number of Closed-end Funds

illustration not visible in this excerpt

Source: Investment Company Institute (Editor), “ A Guide to Closed-end Funds”, Page 4

Closed-end Funds unlike to Open-end Funds

Closed-end Funds are related to Open-end Funds in many respects. Both are Investment companies that pool assets from investors to buy properties.

The keynote is the same- the investors buy into a Closed-end Fund as well as an Open-end Fund by purchasing shares. The investors believe the Fund will meet its objective and perform well, enabling him to capture a satisfactory total return on his Investment.

However there are some differences between Open- and Closed-end Funds.

In the following we want to itemise the main distinctions although some facts about Closed-end Funds have already been mentioned before.

Numbers of sharers

Closed-end Funds have a limited number of sharers because of their fixed capitalization whereas Open-end Funds are constantly redeeming and issuing new sharers. Open-end Funds create new shares each time when new investors invest in the Fund. When they wish to sell them the Fund has to redeem those. Thus, the number of outstanding shares is always changing.

However, when an investor wishes to buy or sell shares of an existing Closed-end Fund he has to purchase them at a Secondary Market.

Trading

Closed- end Funds trade on the stock exchange while Open-end Funds do not. They continuously offer shares to investors at the Net Asset Value (NAV) plus any front-end load or sales charges. They can redeem investor shares at NAV, net of redemption charges or back-end load. Because Closed-end Funds are not tied to the NAV, the price trades above or below its NAV.^[34]

Furthermore the asset horizon of Closed-end Funds is much longer because the shares are not as easy to sell as in Open-end Funds.

Expenses

Not needing to offer shares on a continual basis means that Closed-end Funds typically have lower expenses. They are offered only once on the IPO and are not actively marketed.^[35] Thus, they do not have the extra fees that Open-end Funds may levy in order to pay for marketing the Fund . Closed-end Funds incur operating expenses associated with Fund portfolio management, Fund business operations, custody of the Fund's assets and shareholder services. These operating expenses are paid by the Fund from its assets before any distributions are made to the investor.^[36]

Market

Information about Closed-end Funds is not always available, often creating price inefficiency in a relatively efficient marketplace. Furthermore there are only a few statutory provisions unlike to Open-end Funds.

Cash Flow

While investors in Open-end Funds want to add money to those Funds whose NAV is rising and withdraw it when it is performing poorly, Closed-end Fund portfolio managers do not need to worry about ill-timed redemptions.

Volatility

Closed-end Funds tend to be more volatile than Open-end Funds. The NAV volatility should be the same for both Fund types. The price volatility of a Closed-end Fund indeed tends to be higher because of its market price and the fluctuation of the Discounts and Premiums.

Leverage

One of the most salient features of Closed-end Funds relative to similar Investment products is their ability to leverage their assets.

In other words, an income Closed-end Fund, for example, may borrow assets at a lower rate than the rate at which it can invest those assets in order to enhance its yield to its shareholders. The additional yield comes at the expense of increased net asset value volatility, which can be appreciated or unwelcome depending on the changes of the underlying market.^[37]

The explicit meaning of Leverage and a specific example is processed in the following Chapter.

Prospectus

Unlike Open-end Funds, Closed-end Funds only have to issue a prospectus before they go public. Nevertheless, Closed-end Funds provide shareholders with annual and semi annual reports that contain financial statements and information on the Fund's portfolio, performance, and Investment goals and policies.^[38]

Fees and Commission

Closed-end Funds as well as Open-end Funds may pay a commission to buy and sell shares. In addition, the investor pays fees to the Fund Company for managing and administrating the Fund. But Closed-end Funds do not have to pay marketing and distribution fees.^[39] Thus the expenses of Closed-end Funds tend to be somewhat lower.

2.3.3. Advantages and Risks of Closed-end Funds

Closed-end Funds as well as other pooled Investment vehicles offer several advantages over investing in individual securities.

One of the most outstanding features that distinguish Closed-end Funds from other Investment vehicles is the ability to leverage their assets.

The use of debt to finance an Investment creates what is called “Leverage” in the equity Investment, because it allows investors to magnify the amount of underlying capital they control. Thus, leverage means the degree to which an investor or business is utilising borrowed money. The Closed-end Fund structure with its stable and fixed pool of assets facilitates the use of Leverage.

The so called Leverage effect means that a company or a Fund enhances his total return by borrowing capital for a lower interest rate as the company’s internal rate of return (IRR) and thus provide investors with superior performance.^[40]

The following example shows how Leverage can potentially enrich the yield of a Closed-end Fund.

illustration not visible in this excerpt

Source: According to Wachovia Securities (Editor), “Investing in Closed-end Funds”, Page 2

The Net Asset return has to be higher than the interest rate for the borrowed debt capital. In this case the difference accumulates to the equity capital and may give a quite elevated rate of return on the Fund.

Furthermore, Closed-end Funds have a stable pool of assets available.

Therefore the management team can put capital to act in a long-term strategy without worrying about having the solvency to pay back investors who might sell shares.^[44]

This can lead to superior Investment results as well. As we have already mentioned above, the Closed-end Fund structure is especially advantageous for asset classes where buying and selling individual securities can be difficult. Due to daily redemption request of Open-end Funds it might be reluctant to purchase securities that may be difficult to sell at a fair price on short notice.

Closed-end Funds contrariwise may take advantage of longer-term less liquid issues since they do not have to worry about such redemptions.^[45] Thus they are protected from inopportune cash flows.

Closed-end Funds can manage the portfolio according to market conditions and the Fund’s appropriate strategy without needing to contend with flows of cash into and out of the Fund.

Another advantage of Closed-end Funds are the lower expenses they have to pay because they do not need to offer shares on a continual basis. The shares are normally provided only once on the IPO and are not actively marketed. Higher fees indeed can be a bad coefficient on a Fund’s long –term performance. Finally, the fact that Closed-end Funds trade on an exchange at prices different from the Fund’s NAV gives investors the capability for additional profit.

The structure and basic idea of a Closed-end Fund poses a lot of potential advantages over Open-end Funds or other Investment options.

However, it is crucial to bear the additional risks in mind that are involved when investing in Closed-end Funds. The potential for higher revenue is also accompanied by higher risks.

We want to describe those risks shortly and compare them to those of competing Investment vehicles.

Price Risk

Closed-end Funds Premium and Discount risk refers to the risk that its Discount will expand or its Premium will narrow – that its price will drop comparative to its NAV.

The Price risk in other words refers to the fact that shares of Closed-end Funds are usually traded at a discount from their NAV. Like any stock, each Fund’s or portfolio’s share price varies with market conditions or other factors.

If shares are sold, they may have a market price that is above or below NAV. Thus they may be worth more or less than the original Investment.^[46]

This risk is inexistent for Open-end Funds whose price always corresponds with their NAV.

Leverage Risk

“The risk that the cost to a Fund of its leveraged capital will exceed the earnings on the related assets.”^[47] Leverage can provide higher yields indeed but it can also increase overall risk and have a significant impact on the portfolio volatility.

If the underlying market is increasing, Leverage can augment the price appreciation, but if the underlying market is falling, Leverage can even extend the Fund’s deficit. If the market weakens dramatically, Closed-end Funds can be forced to reduce Leverage. Such a forced reduction in Leverage can lead to a dividend decline.

Thus, Closed-end Funds that are highly leveraged may be at higher risk of bankruptcy. If the cost of leveraged capital will exceed the income of the related assets, the Fund is unable to pay its debt and interest rates; it may also be unable to find new creditors hereafter.

Information Risk

As afore mentioned, Closed-end Funds do not offer shares continuously. They hand out a prospectus only once at its Initial Public Offering.

So unfortunately, key information that would describe a Closed-end Fund really detailed is not available unlike to Open-end Funds which have to publish their reports regularly. That’s the reason why Closed-end Funds are still called “a product of grey capital markets”.

Income Risk

This kind of risk occurs if the income from a Fund’s portfolio will decline and the Fund invests the revenue from shares at market interest rates that are below the portfolio’s current earning rates. In case of leveraged Funds, Income Risk also refers to the risk that short term rates paid will rise what reduces the proceeds to pay dividends.^[48]

The risks related to the structure of a Closed-end Fund are not the only risks.

There are also immanent risks of the underlying assets in which a Fund invests, but we think this will go beyond the scope of our actual subject.

2.3.4. Design of a Closed-end Fund in the U.K.

2.3.4.1. Financial Design

Closed-end Real Estate Funds can be distinguished by the structure of financing. Accordingly, some Funds depend on debt financing to a high extend whereas others are financed trough Private Equity.

One arising difference between the two designs is the fact that investors in an equity based Fund expect early cash distributions in contrast to a Fund that is mainly financed through debt capital. In this case the investors will profit from the allocation of tax losses which can be deducted from their income.^[49]

It is essential to determine the relevant debt-to-equity-ratio which is the indicator of financial Leverage. It compares capital provided by creditors to capital provided by investors. The ratio is calculated by dividing long-term debt by the Private Equity from investors. As Leverage has already been described in the previous chapter, we are not going into further detail.

The question is how borrowing affects a Fund’s cost of capital, and if there is an ideal level of borrowing which will minimise these costs and maximises the Fund value. The capital structure of a Fund is positive if it results in a low overall cost of capital. Consequently, this means a low overall rate of return that needs to be paid on the provided money. If the cost of capital is low, then the discounted value of future cash flows generated by the Fund is high, resulting in a high overall Fund value.^[50] The objective is therefore to find the capital structure that gives the lowest overall cost of capital and consequently the highest Fund value.

The financing may be directly obtained by the Fund, thus, the Fund is the borrower under the loan agreement. Usually, the banks will obtain a mortgage on the property as deposit for the repayment.^[51]

Interest and principal of the bank loans are paid out of the revenues which the Fund receives once the property is purchased.

Difficulties can emerge from unexpected low cash flow if, for example, abrupt vacancy occurs and if the debt can therefore not be paid currently. Actually, the partners would then be required to provide further contributions.

As in the case of a Limited Partnership there would legally be no personal liability of the partners beyond the amount of the contribution that is agreed in the contract.

However, further loans would only be approved by the bank if the limited partners provide personal guarantees – up to the personal liability.

In order to avoid this, the partners can provide equity as the necessary Investment amount for the Fund, by financing their own contributions trough bank loans.

In this regard, the partnership will allocate and pay to the partners any available cash flow which in turn enables them to pay back their loans. Again, the bank will seek deposit in the form of a mortgage on the property in order to secure the repayment of the personal loans of the partners. In this scheme, the personal liability of each investor is limited to his own loan.^[52]

As aforementioned, leveraged Closed-end Real Estate Fund structures allow the partners to use the cost of financing for tax purposes. Tax advantages occur due to the deduction of the losses resulting from the Investment from other income. This has an immediate effect on their personal income tax. The amount of the saved taxes can be used, for example, for the repayment of the borrowed loans. It should be mentioned that the tax rates are progressive meaning that the benefits do not depend on the average tax rate which would otherwise have been applied to the amount of income which is then treated as deductible.^[53]

By contrast, if Funds are mostly equity financed, they can soon allocate and pay profits to the investors.

This aspect makes these Funds especially attractive for investors with medium income who cannot benefit from tax losses due to a reduced level of taxation.

2.3.4.2. Legal Design

2.3.4.2.1. Legal Structure

As Closed-end Real Estate Funds in the U.K. usually operate as Limited Partnerships we want to specialise on the examination of this legal form.

Limited Partnerships have been one of the most commonly employed vehicle structures to pool property Investment.^[54] A Limited Partnership consists of at least one General Partner whose liability towards creditors is not limited, and at least one additional Limited Partner. The liability of the Limited Partner is basically limited to his share of capital invested. This is determined in the partnership agreement and is also registered in the commercial register.^[55] This limited liability status is optional on the non-involvement of the Limited Partner in management decisions. The Investment is passive and the Investment vehicle itself is tax transparent.

Under the commercial code, a Limited Partnership may only exist if is engaged in business activities which are defined in the code.^[56]

Additionally, a Limited Partnership must be registered. Until it is registered it will be regarded as a general partnership and both partners will be equally responsible for any debt and obligations. The lifespan of a Limited Partnership is usually predetermined and varies between 6 and 10 years.^[57]

Limited Partnerships can be complex in their management structures.

However, we give a simplified description of a typical structure in the following.

The originator of the Fund usually creates a General Partner and/or will act as the leading investor. The General Partner may be a company with a special purpose owned by more than one lead investor. This company will have unlimited liability with regard to the partnership.

Typically, an operator is appointed, required by the Financial Services Act (FSA) of 1986.^[58] This operator acts as an FSA regulated body, which will be responsible for a defined quantum of administrative functions.

In establishing the pool of capital required, the General Partner may appoint a promoter to raise capital from Limited Partnerships; in some cases, the promoter may be the originator of the concept and seek a General Partner to act as lead investor.^[59]

The Limited Partners have to contribute capital and can also form an advisory board. However, they can not easily make decisions without losing their limited liability status. Furthermore, the General Partner will appoint an Investment manager and/or asset manager who may, again, appoint a property manager.

The relations between General Partner, operator and asset manager can be connected: in most instances, the same financial services group will provide all of these functions.

To mention as key attributes for a successful Limited Partnership are for example, specialist and expert management and access to large or rarely available capital. Furthermore, transparency of information and tax as well as a directly apparent alignment of interest, tax transparency and access to gearing are also quoted.^[60] Many participants in this market clearly feel that the Limited Partnership format can be an excellent means of structuring co-mingled property Investment with appropriate separation of (and remuneration for) the roles of the parties involved.^[61]

2.3.4.2.2. Purchase Strategy

In executing its strategy a Fund will seek to acquire assets directly or in joint venture with operating, financial or strategic partners.^[62] Although direct acquisition is the prevalent form, joint venture structures are gaining importance especially in the cross-border Investment scene.

The reasons for forming a joint venture may be numerous but essentially there are about two areas – finance and expertise. A Fund may not have sufficient finances to enable it to complete a transaction and find the development costs. Furthermore, different markets require different expert knowledge which can be provided by local partners in the respective countries.

Accordingly, in utilising the resources of strategic partners the Fund can improve its access to potential transactions by taking advantage of their relationships with e.g. a range of corporate, governmental and institutional property owners, as well as with Investment banks. Additional reasons for forming a joint venture include the increased risk in property purchases and the pressure to reduce debt.^[63]

The main types of joint venture structure are the partnership and the joint venture company. The decision which form is used depends on a number of criteria which include: beneficial tax treatment, number of participants, time scale for the transaction and limitations of liability.

Moreover, the participants in a joint venture need to ensure that proper documentation in form of a joint venture agreement is existent. These agreements should contain details of funding level, control, dissolution and profit distribution^[64]

Ultimately the type of transaction will be decided in a case-by-case strategy, because each method has its up- and downsides.

For example, direct acquisition is considered to be more inflexible; and particularly in the form of single deals, in which each property is traded individually, they involve extremely high transaction costs.

In case of joint ventures, on the other hand, both the strategic partners and their relationships must be utterly trustworthy and professional as the success or failure of the Fund relies on their work to a great extent.

2.3.4.3. Fiscal Design

An Investment in a Fund involves a number of complex tax considerations, particularly concerning Pan-European Investments.

Any of the countries in which the Fund will have Investments can have different tax legislation, or differences in tax treaties negotiated by those countries. These discrepancies could affect the returns from the Fund to Interest holders in a negative way. No assurance can be given regarding an actual level of taxation imposed upon a Fund.^[65]

The business of a Fund has to be conducted in such a way so as to ensure that it is not treated as a separate taxable entity. Each Investor will be subject to taxation on profits and gains of the Fund according to its particular tax status and the jurisdiction in which it is resident for taxation purposes.^[66]

Furthermore, it is important to ensure that the Fund is not treated as carrying on a trade in its home jurisdiction. As a result, an Investor should only be subject to tax in the home jurisdiction of the Fund to the extent that he is either resident or otherwise carrying on a trade in the home jurisdiction of the Fund.^[67]

However, this only applies if this trade is connected with the Fund’s interest and the Investor’s income is not otherwise protected by an applicable Double Tax Treaty.

Generally, a Fund expects to acquire interests in its Investments through one or more subsidiaries, or other wholly owned entities.

Usually, income, profits and gains of underlying Investments will be subject to taxation in the jurisdiction in which the Real Estate asset is located.^[68]

The incidence of this taxation on income should be minimised so that profits or gains distributed through the Fund are not affected adversely. This can be accomplished through careful structuring of the Investments, provided that the objectives of the Fund are consistent with this structuring.

2.3.5. German Real Estate Funds investing in the U.K. – Focus London

In comparison with other European countries, Germany is the front-runner in the cross-border Investment section. According to DTZ Research, German Investors have conducted 30% of cross-border transactions and in 2003 – they even outperformed the USA.^[69]

The most popular target country for Real Estate Investments still is the U.K. and a change is not expected. Factors, that contribute to the U.K.’s enormous popularity are, e.g., the beneficial structure of lease contracts, high market transparency, and appealing rates of return. A further essential argument that has to be mentioned is the tax advantages in the U.K. The tax free amount is related to the inflation rate and currently amounts to £4,895. Consequently, an Investor can participate in an Investment Fund with £65,000 (€96,000) without being taxed in the U.K..^[70]

Generally, there is hardly another Real Estate market that has to offer as many superlatives as the U.K. – and especially London. Of course, the attributes “biggest”, “most liquid” and “most professional” are not only used by enthusiastic investors, they are in fact attestable. London is considered to be the economic centre of Europe and it is besides New York and Tokio the third biggest trade centre for the stock market, the globally leading emporium for foreign exchange transactions and also for raw materials and base metals. Furthermore, more than 500 foreign banks and insurance companies are located in the English capital.

This, in fact, has a great impact on the London Real Estate market. Following Paris, London is the second-biggest office market in Europe with approximately 28 million square metres of office area.^[71]

On average, the rent with an estimated £620-£700 per year and per square metre is twice as expensive as in Frankfurt and New York.^[72] Scarcely another city lists as many purchases and disposals of Real Estate than London. This, of course, attracts many private and institutional investors.

According to a study conducted by CB Richard Ellis, London still is the top location in Europe. In first half of 2005, €9.27 billion which is 16.8 % out of a total €55.2 billion Investment volume were invested in London.^[73] Particularly, the London office market became more and more attractive since the Millennium. As the financial markets performed very week, reduction in staff and, generally, company closures were reasons for developing vacancy and decreasing rents –up to 20% every year.

Accordingly, the prices for office buildings in London declined. This decline was an incentive for many institutional investors to purchase Real Estate at a bargain price. In 2004, Real Estate agents reported more than 300 transactions with an estimated value of £9.5 billion. Among these investors were also German Real Estate Funds, of course.^[74]

In the first quarter of 2005, Commerzbank, KanAM, CSAM, IVG, Difa and Nordcapital purchased office buildings in London for approximately GBP 700 million. Although then initial yield is only at 5%, institutional investors expect rent to increase over the next years and thus to compensate the low yield.
Altogether, 2004 and 2005 were auspicious years for the lease market in London. The lease activities increased by 77% compared to 2003.^[75] This also contributes to the fact that rents are stabilising again. According to Robert Orr, CEO of Jones Lang LaSalle Europe, the rents in the London City stabilised in 2005 and they will increase again in 2006.^[76] The London Real Estate Market compared to other cities is very volatile – meaning however, that, in an economic boom, the market can recover faster than in any other metropolis.

The scientists of the Centre for Economic & Business Research calculated that until 2008, 125,000 new jobs could be generated in London – there will be no lack of demand for office space and the investors that purchased or are purchasing Real Estate in London will profit from this development to a great extent. Market Analysis conducted for the year 2004 has estimated that, as aforementioned, the U.K. is the most popular country for German institutional Investors. Approximately €273 million were invested by German investors. Accordingly, the Total assets under management cumulated to €579 million for 2004. Market leader was MPC Capital AG with €106 private equity and €270 million assets under management. Closely following is DB Real Estate. Their share of the Fund “Metropolis 1” that invests in London amounts to €100 million of private equity and €178 million of assets under management.^[77]

The following chart shows other selected Closed-end Real Estate Funds that invested in the U.K..

Figure 10: Investment in U.K.

illustration not visible in this excerpt

Source: According to IVG Immobilien AG (Editor), „Europas Investmagazin - „Britische Superlative“ December 2004

Concerning cross-border Investment in general, the Bundesfinanzministerium has published the introduction paper to the Investmentsteuergesetz (InvStG) that should facilitate the implementation of the InvStG that was introduced on 1st January of 2004.^[78] According to this law, the punishment tax on Real Estate Funds investing in more than three assets in foreign countries was abolished. This provides more opportunities for investors regarding their Investment strategy and risk diversification. Funds can now benefit from reasonable Investment structures and don’t have to accommodate them to the InvStG or, if necessary, abandon the opportunity.

2.4. Conclusion

In the past years, mainly shares, bonds or even cash were considered in asset allocation decisions whereas Real Estate Investment has played a minor role.

This changed remarkably within the last years due to the increase of Real Estate returns and the European establishment of a more transparent market. This development has made Real Estate a more mature and more active sector to invest in. Private investors have discovered Real Estate as a secure and long term opportunity to augment their capital. But also institutional investors such as insurances or credit institutes have realised the advantages of this asset class.

For those who want to bypass the knowledge barriers required to do direct cross-border Investment, the logical answer is to go indirect in order to avoid the need for finding a local partner in each market.

Due to the high costs related with direct Investment across borders, going alone in every market is not realistic and efficient for investors. Thus, for the last few years more Real Estate Funds were created to meet the evolving demand and also the diversity of the particular offerings has increased.

The variety and the high returns that these Funds can offer as well as the ability to realise the Market Opportunities that may seem inefficient or hard to understand for non specialists attract the vast majority of institutional investors.

INREV (Investors in non-listed Real Estate vehicles), the lobby group for indirect Investment vehicles in Europe notes that there has been a trend towards more Value-added Funds and Pan-European offerings in contrast to previous years.^[79]

The European Property Investors L.P. that we analyse in the following can be considered as a significant example for this recent development.

Although indirect Funds are a popular option for institutional investors, this relatively young market also seems to experience serious problems.

The number of products in this sub- market is growing, but consequently the arising demands from investors must also be considered.

Especially in the Closed-end Fund sector, Fund managers have to face several worries on the investor’s side. These are for example illiquidity due to lack of a functioning secondary market, in-transparency as well as long term commitment of capital.

As already mentioned Real Estate transparency has surely improved within the last years due to the creation of reliable indices. However, Closed-end Real Estate Funds are still considered as part of the so-called “grauer Kapitalmarkt” as there is no general legal basis that controls the Funds operations.

Furthermore, the long Investment horizon of at least 10 years is a common argument against Investment in Closed-end Funds.

However, the strong appetite for indirect Investment is demonstrated by the number of Pan-European Funds that have been launched recently.

We believe that this increase will be the key to growth in the European property Fund management sector if managers succeed in solving the above mentioned problems and herewith gaining confidence from investors. We are convinced that in this case the successful amount of € 81.8 billion private equity in 2004 out of total € 171 billion assets under management invested in Closed-end Funds can still be extended in the future.^[80]

3. Empirical analysis of the Closed-End Real Estate Fund “European Property Investors” L.P.

3.1. Curzon Global Partners

Curzon Global Partners is a London-based Investment management company dedicated to design and execute Real Estate Investment strategies that preserve capital and maximise return performance.

The company offers a range of Investment services intended to match client capital with Real Estate market opportunity.

The holding company of Curzon Global Partners is IXIS AEW Europe, a European Real Estate Investment manager focused on the creation, execution and management of Investment vehicles, separate account strategies and strategic portfolio advisory services to institutional investors as well as private clients.^[81]

IXIS AEW itself is an affiliate of CDC IXIS Asset Management, the asset management arm of Caisse d' Epargne Group in France.

The Group is a large diversified financial service Institution and is operating throughout Europe. Thus, it is a pre-eminent Pan-European Real Estate company that has € 11billion in gross assets under management.

Additionally, the Co-operation of IXIS AEW Europe with the North American-based AEW Capital Management creates a global Real Estate Investment management platform with total gross assets under management of over €23 billion.

A detailed Organigram which shows the interdependences and relations of the enterprise is attached in Exhibit B.

The Fund management of Curzon Global Partners includes the acquisition of stabilised assets and portfolios, purchases of development projects, re-development as well as recapitalising or restructuring corporate balance sheets.

They acquire assets directly and invest via joint ventures and other negotiated equity or equity-oriented positions investing in all types of commercial property. The target Investment area includes countries within Western Europe.

Curzon’s particular Investments comprise three different levels of risk and return what is shown in the following graph.

Figure 11: Risk Categories

illustration not visible in this excerpt

Source: According to Curzon Global Partners (Editor), “Private Placement Memorandum”, Page 15

Curzon’s Core Capital Funds consider markets with low risk profiles and a high degree of economic development. Operating assets should ideally be fully stabilised or at near to stabilisation. Furthermore they deal with relatively low rates of debt capital.

Curzon’s Core-Plus Capital Funds are Pan-European "income and growth" Funds seeking opportunities to acquire properties likely to experience significant growth in current return as the local Real Estate cycle is increasing. Additionally these “value-added” Funds want to take advantage of restructuring or capital-constrained markets likely to create short or intermediate-term opportunities. The degree of debt capital here is relatively high. The Investment size is €10 - €40 million in the logistics sector and €25 - €120 million in the other sectors. The typical Investment holding period is 5 – 10 years.^[82]

Curzon’s Core Plus Plus Funds are Pan-European Corporate Outsourcing Funds seeking for opportunities focused on mid-sized, value-added sale and leaseback transactions. They focus on markets with currently low economic developments and financial pressure in order to provide liquidity for governments or companies.

The preferred Investment size is €100 – €500 million and the typical Investment holding period is 2 – 8 years.^[83] The debt financing ratio here is quite high.

European Property Investors L.P. is a prime example for such a Real Estate Outsourcing Fund.

[...]

---

^[1] Imai, M., Chairman and Founder of the KAIZEN Institute, in Schulte, D. (Editor), “Zitate zu Wissensmanagement”

^[2] See Schäfers, W.: “Strategisches Management von Unternehmensimmobilien“ in Schulte K.W.(Editor), Schriften zur

Immobilienökonomie, Vol 3, Cologne 1997, Page 37

^[3] See Graaskamp J.A.:“A Rational Approach to Feasibility Analysis” in: The Appraisal Journal (Editor),1972, Page 13

^[4] Pyhrr, S.A. / Cooper, J.R.: ”Real Estate Investment- Strategy, Analysis, Decisions.” NY 1989, Page 5

^[5] See Thomas, M. / Aumann C., “Real Estate as an Asset Class” in “Handbuch Institutionelles Asset Management, Leser,

H./Rudolf M. (Editor), 2003, Page 660

^[6] See DTZ Research (Editor),” Money into Property”, Europe 2005 Overview, May 2005, Page 3

^[7] See Urban Land Institute and Price Waterhouse Coopers (Editor),"Emerging Trends in Real Estate Europe 2005”, Page 9

^[8] Ernst &Young (Editor), ” Maturing Opportunistic Real Estate Private Equity Fund sector faces rising challenges” [Article],

February 2002

^[9] See Jones Lang La Salle (Editor), “European Capital Markets Bulletin, Full Year 2004”, European Research,2005, Page 1

^[10] See Schulte, K.W. “Betrachtungsgegenstand der Immobilienökonomie“ in: Schulte K.W.(Editor), Immobilienökonomie,

Vol.2, 2001, Page 137

^[11] See DTZ Research (Editor), “Money into Property”, Europe2005 Overview, May 2005, Page 3

^[12] See Thomas, M./ Aumann, C., “Real Estate as an Asset Class” in “Handbuch Institutionelles Asset Management, Leser,

H./Rudolf, M. (Editor), 2003, Page 669

^[13] See Kobler, A., ”How to integrate Real Estate Investments in a portfolio”, [Article], UBS (Editor), February 2005

^[14] See Larsen, J.E., “The impact of loan rates on direct Real Estate Investment holding period return” [Article], Financial

Services Review (Editor), Summer 2004

^[15] See Kälin, C.H., “International Real Estate Handbook: Acquisition, Ownership and Sale of Real Estate Residence, Tax and

Inheritance Law”, Wiley & Sons (Editor),January 2005, Page 6

^[16] See Jones Lang LaSalle (Editor): “European Capital Markets Bulletin, First Half 2005”, European Research, Page 3

^[17] See Kälin, C.H., “International Real Estate Handbook: Acquisition, Ownership and Sale of Real Estate Residence, Tax and

Inheritance Law”, Wiley & Sons (Editor),January 2005, Page 6

^[18] See Thomas, M./ Aumann, C., “Real Estate as an Asset Class” in “Handbuch Institutionelles Asset Management, Leser,

H./Rudolf, M. (Editor), 2003, Page 617

^[19] See Kutsch, N. / McAllister P. / Newell, G., “Private Property Vehicles: The Valuation of Interests in Limited Partnerships”,

ERES Conference, Dublin (Editor), June 2005, Page 5

^[20] See DTZ (Editor),” Real Estate fund of funds: fashion, future growth and a flood of new issues” in the Corporate Finance

Report, Spring 2005, Page 4

^[21] See Lizieri C. and Ward C., “Financial Innovation in U.K. Property Markets: A Review of Trends and Prospects”, University

of Reading (Editor), October 2004, Page 20

^[22] See The University of Reading and Oxford Property Consultants (Editor), “Liquidity and private property vehicles: where

next?” October 2001, Page XI

^[23] See Kutsch, N. / McAllister, P. / Newell, G., “Private Property Vehicles: the valuation of interests in Limited Partnerships”,

ERES Conference Dublin (Editor), June 2005, Page 5

^[24] See Lizieri C. / Ward C., “Financial Innovation in U.K. Property Markets: A Review of Trends and Prospects”, University

of Reading (Editor), October 2004, Page 22

^[25] See Kutsch, N. / McAllister, P. / Newell, G., “Private Property Vehicles: The Valuation of Interests in Limited Partnerships”,

ERES Conference Dublin (Editor), June 2005, Page 1

^[26] See Kutsch, N. / McAllister, P. / Newell, G., “Private Property Vehicles: The Valuation of Interests in Limited Partnerships”,

ERES Conference Dublin (Editor), June 2005, Page 2

^[27] UBS Investment Research (Editor), “A Guide to Closed-end Funds”, [Brochure], October 2003, Page 3

^[28] Closed-end Fund Association (Editor),“Understanding the Advantages of CEF”, 1999, Kansas City, Page 15

^[29] See UBS Investment Research (Editor), “A Guide to Closed-end Funds”, [Brochure], October 2003, Page 5

^[30] See Gondring, H./ Feldhoff, P.J., “ Real Estate Investment Banking- Entwicklung, theoretische Grundlagen und

Instrumente” in Gondring, H./ Zoller,E./ Dinauer, J.,“Real Estate Investment Banking“, 2003, Page 18

^[31] See Morningstar Report (Editor), “Closed-end Funds data definitions”, 2005, Page 3

^[32] See Gondring, H./ Feldhoff, P.J., “ Real Estate Investment Banking- Entwicklung, theoretische Grundlagen und

Instrumente” in Gondring, H./ Zoller,E./ Dinauer, J.,“Real Estate Investment Banking“, 2003, Page 19

^[33] See Equity Marketing Group (Editor), “ Interest Rate Risk among Income Closed-end Funds”, 2001, Page 2

^[34] See UBS Investment Research (Editor), “A Guide to Closed-end Funds”, [Brochure], October 2003, Page 7

^[35] See Wachovia Securities (Editor), “Investing in Closed-end Funds”, 2003, Page 3

^[36] See Investment Company Institute (Editor), “ A guide to Closed-end funds” , Page 14

^[37] See Gondring, H./ Feldhoff, P.J., “ Real Estate Investment Banking- Entwicklung, theoretische Grundlagen und

Instrumente” in Gondring, H./ Zoller,E./ Dinauer, J.,“ Real Estate Investment Banking“, 2003, Page 22

^[38] See Investment Company Institute (Editor), “ A guide to Closed-end funds” , Page 14

^[39] See Paine Webber (Editor), “Report about Closed-end Funds” , Industrial Overview, 2000, Page 5

^[40] See Geltner, D./ Miller, N.G., „Commercial Real Estate analysis and Investment” Page 306

^[41] 8% of € 150 million in Net Assets

^[42] 8% of € 100 million in Net Assets

^[43] 4% of € 50 million of Leverage

^[44] See Closed-end Fund Association (Editor), “Understanding the Advantages of CEF”, 1999, Kansas City, Page 7

^[45] See UBS (Editor), Investment Research, “A Guide to Closed-end Funds”, October 2003, Page 9

^[46] See UBS (Editor), Investment Research, “A Guide to Closed-end Funds”, October 2003,Page 10

^[47] Closed-end Fund Association (Editor), “Understanding the Advantages of CEF”, 1999 ,Kansas City, Page 13

^[48] See UBS (Editor), Investment Research, “A Guide to Closed-end Funds”, October 2003,Page 10

^[49] See Gasteyer, T. “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor), 1991,

Page 568

^[50] See Bush M, F., “Municipal Closed-end funds and Interest rate risk”, Equity Marketing Group (Editor),September 2004,

Page 2

^[51] See Thomas, M./ Aumann, C., “Real Estate as an Asset Class” in “Handbuch Institutionelles Asset Management, Leser,

H./Rudolf, M. (Editor), 2003, Page 62

^[52] See Gasteyer, T., “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor), 1991,

Page 568

^[53] See Gasteyer, T., “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor),1991,

Page 570

^[54] See Kutsch, N. / McAllister, P. / Newell, G., “Private Property Vehicles: the valuation of interests in Limited Partnerships”,

ERES Conference Dublin (Editor), June 2005, Page 2

^[55] See Thomas, M./ Aumann, C., “Real Estate as an Asset Class” in “Handbuch Institutionelles Asset Management, Leser,

H./Rudolf, M. (Editor), Page 62

^[56] See Gasteyer, T. “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor), 1991,

Page 565

^[57] See University of Reading and Oxford Property Consultants (Editor), “Liquidity and private property vehicles: where next?”

October 2001, Page 2

^[58] See Financial Services Authority (Editor), “Theory of Corporate Finance” under the Financial Services Act (FSA) of 1986

^[59] See University of Reading and Oxford Property Consultants, “Liquidity and private property vehicles: where next?” October

2001, Page 2

^[60] Hook, Andrew, Associate Director, information was collected by questioning

^[61] See University of Reading and Oxford Property Consultants (Editor), “Liquidity and private property vehicles: where next?”

October 2001, Page VI

^[62] See Curzon Global Partners (Editor), “Private Placement Memorandum”, Page 12

^[63] See Isaac, David, “Property Development – Appraisal and Finance”, Palgrave MacMillan (Editor), February 1996, Page

190

^[64] See Isaac, David “Property Development – Appraisal and Finance”, Palgrave MacMillan (Editor), February 1996, Page

190

^[65] See Curzon Global Partners (Editor), “Private Placement Memorandum” Page 42

^[66] See Gasteyer, T., “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor),

1991, Page 569

^[67] See Curzon Global Partners (Editor), Private Placement Memorandum, Page 42

^[68] See Gasteyer, T., “ Closed- end Property funds” in “Journal of property finance”, Stewart Henry publications (Editor),1991,

Page 569

^[69] See „Die Welt“ (Editor), „Investoren gehen im Ausland auf Renditejagd“ [Article], April 8th, 2003

^[70] See Anastassiou, C., „Herdentrieb führt britische Anleger in die City von London“ [Article], Welt am Sonntag (Editor), June

14th, 2005

^[71] See IVG Immobilien AG (Editor), „Europas Investmagazin - Britische Superlative“ December 2004, Page II

^[72] See Nordcaptial (Editor), „Trends und Märkte – Der Immobilienmarkt in London“, 3rd quarter 2005, Page 1

^[73] See "Die Welt" (Editor), “Europa - Top-Ten Immobilien Investment-Standorte”, October 12th 2005, Page 24

^[74] See IVG Immobilien AG (Editor), „Europas Investmagazin - Britische Superlative“ December 2004, Page II

^[75] See Nordcaptial (Editor), „Trends und Märkte – Der Immobilienmarkt in London“, 3rd quarter 2005

^[76] See IVG Immobilien AG (Editor), „Europas Investmagazin - Britische Superlative“ December 2004, Page II

^[77] See Loipfinger, S. (Editor), “Marktanalyse der Beteiligungsmodelle 2005“, Page 14

^[78] See Fondzeitung – Alternative Investments (Editor), „Investmentsteuergesetz – neue Freiheit für

Auslandsimmobilienfonds“, 30th of June 2005

^[79] See Urban Land Institute and Price Waterhouse Coopers (Editor), “Emerging trends in Real Estate Europe”, 2005, Page 8

^[80] See Loipfinger, S. (Editor),:“ Marktanalyse der Beteiligungsmodelle 2005“, Page 7

^[81] See IXIS AEW Europe (Editor), Company Profile [Brochure], January 2005, Page 2

^[82] See IXIS AEW (Editor), “Accessing capital”, in Capital overview

^[83] See IXIS AEW (Editor), “Accessing capital”, in Capital overview