Unlocking real estate potential: How ELTIF 2.0 empowers retail investors in Europe

The updated regulations surrounding European Long-Term Investment Funds (ELTIFs) are set to enhance capital mobilization and broaden retail investor participation. In certain domains, notably real estate, alternative asset managers have become adept at managing funds with semi-liquid characteristics. The advent of ELTIF 2.0 expands the horizon, offering novel investment solutions that concurrently cover tangible assets and those liquid assets eligible under UCITS. Examining the evolution of ELTIFs reveals a comprehensive market overview, opportunities, challenges, and the practical usage of additional asset classes in response to these changes. However, the difficulty of fundraising remains a challenge that could be improved through increased capital from retail investors.

ELTIF 2.0 and History 1.0

The adoption of ELTIFs faced significant hurdles due to overly complex and restrictive rules, particularly concerning portfolio composition and distribution. The list of eligible assets was limited, the €10 million threshold for a single investment was high, and the stringent conflict of interest provisions made it difficult to develop products that could achieve the desired returns for investors. ELTIF 2.0 represents a significant modification of the initial ELTIF framework, which was marred by its inflexibility and now brings greater flexibility regarding eligible assets, portfolio composition, and distribution, along with more lenient requirements for ELTIFs marketed exclusively to professional investors. New features include the removal of the €10,000 minimum entry fee for retail investors, an expanded range of investments classified as "ELTIF eligible assets," and the ability to create fund of fund strategies (ELTIFs investing in eligible EU AIFs), among others. ELTIF 2.0 is set to make its mark in the private market sector, offering a unique solution tailored to the needs of most asset classes and capable of capturing the market potential for retail investors.

Market Overview

ELTIF 2.0 has led to a notable increase in the number of ELTIFs as early as 2024. The original 2015 regulation, ELTIF 1.0, resulted in the establishment of 93 alternative investment funds (AIFs) in a few jurisdictions, including Italy, France, Spain, and Luxembourg with the introduction of ELTIF 2.0 in December 2023. According to the latest 2024 ESMA register update¹, out of the 139 registered ELTIFs in the EU, 65% are registered in Luxembourg. Over recent years, Luxembourg's regulatory authority, fund sponsors, and the fund industry have slowly gained experience in establishing ELTIFs and are on the right path towards achieving the desired traction. However, new ELTIF registrations are also appearing in other countries such as Italy, Spain, France, Germany and Ireland. Luxembourg is the most influential hub for ELTIFs due to its early adoption, its well-established service provider network, including central administration and third-party managers, and its experience in the cross-border distribution of investment products. Each country employs slightly different approaches to incentivize these funds.

Opportunities and Challenges

The introduction of semi-liquidity through redemption options in ELTIF 2.0 presents a compelling opportunity for investors, particularly enhancing its attractiveness to the retail segment. For asset managers, servicers, and distributors, operational efficiency is key to capitalizing on these opportunities. Investment managers are tasked with modeling complex cash flows, distinct from those in traditional, closed-end funds. Fund accountants are also adapting, developing methods to accurately combine liquid and illiquid assets for net asset value calculations. Registrar agents are essential in linking retail distribution networks to the ELTIF's shareholder register, necessitating robust technical systems like SWIFT and nominee accounts to manage the influx of retail investor activity and their associated transactions. This technical infrastructure is crucial for managing the large number of retail investors and their subscription and redemption activities, particularly with the use of liquidity management tools such as notice periods, lock-up periods, or redemption gates. Additionally, country-specific retail distribution requirements, such as stock-exchange listings or DvP settlements, must be addressed. Significant investment in educating the distribution network is also necessary. To ensure the success of ELTIF 2.0, other EU Member States should consider implementing tax advantages for retail investors, similar to those already in place in Italy.

Is ELTIF 2.0 suitable for Real Estate? 

The strength of ELTIFs in real estate comes from their capacity to pool funds for property development, acquisition, and management, offering investors a share in the resultant growth and income. By doing so, ELTIFs effectively bridge the gap between the substantial funding needs of large-scale real estate projects and the capital provided by retail investors. This creates a symbiotic relationship where retail investors can participate in significant property ventures that were previously accessible only to institutional investors. ELTIFs democratize the investment process, allowing individuals to benefit from the long-term value creation inherent in real estate, while simultaneously driving forward ambitious development projects that shape the urban landscape. Additionally, there is a growing interest among retail investors to invest in alternatives, particularly those who are uncertain about receiving an adequate pension, making ELTIFs an attractive option for securing their financial future. With the real estate market showing signs of recovery, we expect to see a rise in Real Estate ELTIFs, highlighting the importance of rigorous due diligence and a deep understanding of the regulatory and tax landscape surrounding ELTIFs. The revised ELTIF 2.0 framework is set to better meet the needs of the real estate market, making real estate investments more accessible. As the market recovers, ELTIF 2.0 could become a key funding source for real estate projects. The success of these funds will depend on fund managers' expertise in handling operational complexities and the potential for tax incentives to encourage retail investment.

Summary

In summary, ELTIF 2.0 offers a promising path for real estate funds in Europe's economy. The growing interest of the population in alternative investments further enhances the appeal of ELTIFs, as these funds present an opportunity to diversify beyond traditional stock and bond portfolios. This shift is indicative of a broader trend where more individuals are seeking to invest in tangible assets with the potential for stable, long-term yields. Fund managers and investors must remain abreast of regulatory updates to effectively incorporate these funds into their strategies. With the appropriate operational and regulatory guidance and expert support, ELTIF 2.0 is offering sustainable investment opportunities that reflect evolving consumer preferences and market demands, while catering to the investment appetite of an increasingly savvy middle class.