This content is from: Local Insights

Real estate funds

Since the inauguration of the Act on Collective Investment in 2000, collective investment has been the most rapidly evolving sector of the capital markets in the Slovak Republic. To meet market demand for more possibilities for collective investment, a new type of fund has been introduced, allowing specialized portfolios to be created that are comprised solely of real estate assets.

This special real estate fund was created by an amendment to the Act effective May 1 2006. Before this date, only two special funds were allowed: [high-]risk special share funds and diversified special share funds. In regulating the creation and administration of specialized real estate funds, the Slovak Republic followed the example of financial markets such as those in Germany, Austria and Luxembourg, and the experience of V-4 states where this type of fund was recently introduced (for example, in the Czech Republic in 2004).

Restrictions have been imposed on initial investments (to protect share fund owners with an inappropriate risk profile or investment level). One investor must invest into at least €3000-worth of shares. This creates a distinction between the common retail investor and the typical investor for whom such funds are designed.

Unlike the other two types of special share funds, certain restrictions do not apply to real estate funds. Real estate funds are not limited by the time restrictions specified in the Act and can be created as either opened or closed funds.

Approval from the National Bank of Slovakia is required to create a special share fund of real estate. In this respect, the provisions covering the other two special funds mentioned above also apply.

The assets of a real estate fund may be invested into real property and by capital participation in real estate companies.

A fund can only acquire real property that produces regular and long-lasting profit or that could produce profit from its sale. It is also possible to acquire real estate in foreign countries. The Act contains several investment limits and restrictions regarding acquisition or (the margin of the investment measured on) the overall value of the real estate in a fund's portfolio. For example, the value of the real estate before acquisition must not exceed 20% of the value of the fund's assets. However this limit does not apply in the first three years of a fund's existence and in this time the administrator is not obliged to repay outstanding shares. This provides time for the fund to create an adequate property portfolio and to harmonize this portfolio with the limits and restrictions imposed regarding the fund's assets.

The administrator is also limited in determining the price of real property. The determination is carried out through an expert appraisal. If the real purchase price varies from the appraised price by more than 5%, the consent of the fund's depository is required. This consent will be rendered if the price is due to valid economic reasons.

The consent of the depository is obligatory for each of the fund's acquisitions or sale of real property.

A real estate company is defined by the Act as a joint stock company or foreign trade company with a specified scope of business (for example, acquisition of real property, reconstruction, or sale of real property). The value of capital participation in a single real estate company must not exceed 30% of the value of the fund's assets. Before capital participation is acquired, the value of the real estate company must be determined by expert appraisal. The consent of the share fund's depository is necessary for the sale or acquisition of capital participation on the real estate company.

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