Real estate funds: Real estate working group calls for clarity on applying SFDR to real estate investments

21 June 2023

A working group comprising three industry bodies: AREF, INREV and IPF, has issued a solutions paper to address the challenges GPs face in applying SFDR to real estate investments.

In its member briefing of earlier this year, INREV highlighted that “many found that interpreting RTS designed for the public markets for investments in private real estate products required considerable mental agility” and attempting to apply some of the requirements of SFDR in fact could have the unintended consequence of diverting real estate allocations away from transitional assets – the very assets presenting the biggest challenge from a decarbonisation perspective.

The solutions report attempts to more precisely identify what steps can be taken to address some of these challenges.

We strongly agree that real estate sector specific guidance is required. SFDR is not in unfamiliar territory from an EU law perspective in seeking to apply disclosure and methodology to all asset classes on a “blanket” basis. However, as industry bodies have highlighted, attempting to apply regulation apparently primarily devised with public markets in mind (with typically short term trading horizons) to assets with a longer term investment horizon, particularly real assets, can have significant and unintended consequences. Until further guidance is provided, GPs will need to apply SFDR with measured and reasoned judgment - seeking to ensure they can support their approach, in particular their ability to source reliable data from underlying investments, and ensure transparent and full disclosure with LPs, to avoid any risk of greenwashing. For LPs seeking to use SFDR data to compare real estate investments; they need to be cognisant that such data requires GP interpretation and that such interpretation will vary from GP to GP, making it difficult to compare data.