The Czech Act on Collective Investment has been amended in the area of real estate funds (REFs), effective as of May 26 2006. REFs had theoretically already been enabled by the previous regulation, in place since May 1 2004, but it was too general and highly impractical. As a result, no REF was established under the previous regime. The recent amendment (based on the German model) stipulates in much more detail the requirements for an REF's establishment, investment policy and assets valuation. So far, one REF has been licensed under the new regime.
REFs may only be established as open-end funds. Taking into account the lower liquidity of real estate assets, REFs may stipulate in their statute a deadline of up to six months for redemption of their units (standard open-end funds must redeem their units within 15 business days). An REF's statute may also stipulate specific dates for accepting redemption requests, while the time interval between such individual dates may not exceed six months. Further, REFs may stipulate in their statute that the suspension may last up to two years, while standard open-end funds cannot suspend redemption for more than three months.
REFs may invest either directly in real estate or in shares of real estate companies. REFs may acquire real estate encumbered by a pledge, or establish a pledge solely to obtain credit. Subject to specific conditions, REFs may also invest in foreign real estate.
The value of one property on the date of its acquisition may not exceed 20% of the value of the REF's total assets. A REF may increase this limit in its statute to 60% of its total assets for the three years after receiving its licence. It is not obliged to redeem its units during this period. The total value of the properties not appreciable by the yield method (that is, acquired predominantly for their future profitable resale) must not exceed 25% of the value of the REF's total assets. The value of a stake in a real estate company must not exceed 30% of the value of the REF's assets. If the value of a property or a stake in a real estate company exceeds the above limits by more than 10% after their acquisition, the REF must make the necessary adjustment within three years of the transgression of the limits.
A property that an REF intends to acquire or sell must be valued by two independent experts. One expert will be appointed by the REF's management company and the other by the depositary. There are statutory limits on the purchase and sale price. An REF must not acquire property held by its management company or its depository. The acquisitions and disposals of properties, as well as any encumbrances, are subject to the depository's approval. Regular valuation of the REF's assets (which must be included in its annual and semi-annual reports) must be performed by an independent expert board.
Lastly, to ensure sufficient liquidity, a REF must hold between 20% and 49% of the value of its assets in the form of demand deposits, term deposits with a maturity of up to a year, or several types of liquid securities defined by the Act. If the redemption of the REF's units threatens to reduce the value of its liquidity reserve below 20% of the value of the REF's assets, the redemption of units must be suspended.
Paul Sestak and Michal Pravda