IQ-EQ’s Head of Real Estate for Luxembourg, Tamas Mark, shares his insight into real estate corporate governance issues and trends amid ongoing COVID-19 disruption
In this episode, we’re keeping this close to home as funds director Tom Miller is joined by Tamas Mark, our head of real estate in Luxembourg, to discuss corporate governance within the real estate sector in the context of COVID-19.
This conversation builds upon and provides an update following Tamas’ April article sharing tailored corporate governance guidance for each of the key real estate sectors in line with how they would likely be impacted by COVID-19 disruption.
As we’re now a few months into the pandemic and lockdowns are gradually lifting, Tamas discusses how things are looking in the real estate space at present. From his experience as a non-executive director of client companies, he shares valuable insight into the common themes and pressing issues discussed in board meetings, key trends and changes, the role and lasting impact of technology, as well as some specific points from a Luxembourg perspective.
Tamas Mark joined IQ-EQ in Feburary 2020 with more than 15 years’ experience in the corporate services and tax industry, during which he gained significant experience managing complex real estate structures across a multitude of property sectors. He has held a number of strategic senior leadership roles, building a strong understanding of the European real estate market as well as key global client relationship management expertise. Tamas is a chartered accountant, certified tax adviser and is MRICS qualified. He is also an active member of multiple Luxembourg-based industry working groups.
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Hello and welcome to IQ-EQ Real Estate Focus, our dedicated podcast series where we hear from industry experts on the latest trends and hot topics within the real estate sector. I’m Tom Miller, your host for today. In this episode, we’re keeping things close to home as I am joined by Tamas Mark, our head of real estate in Luxembourg, to discuss corporate governance within the real estate sector in the context of COVID-19. Hi Tamas!
Hi Tom, thanks for having me.
Back in April, you published an article providing tailored corporate governance guidance for each of the key real estate sectors in line with how they would likely be impacted by COVID-19 disruption. We’re a few months into the pandemic now and lockdowns are gradually lifting. How are things looking in the real estate space at present? Have things played out as expected?
Yes, I think that the guidance was pretty accurate actually and we've seen that some of the asset classes have been more heavily impacted than others. We literally saw that, from one day to another, retail and hospitality basically stopped generating cash, which obviously gave a lot of headache to the directors. From the view of the board, I think the key aspect has been how to manage the cash flow of their entities, how to manage the relationship with the lenders. Um, and also the health and safety aspects was a priority and they had to make sure that they take necessary measures. Now, we see now that some of the investors are able to inject significant capital expenditure to meet the criteria of this new world, to make sure that, you know, the buildings respond to the new requirements. For example, the touchless entry to the building will become a basic requirement from tenants. Breakout rooms in the offices – this is something also that we are going to see, which obviously requires more office space. And, in general, the wellbeing of the employees will be in the centre of the tenants and this will help them to retain talents as well. So this is something that they will expect actually from the offices that they rent. Another trend that we see currently is that this pandemic sort of drives investors towards more stable assets. What I mean here is that cashflow has become so important these days that we see that the opportunistic and the value-add transactions really slowed down and investors are favouring more Core and Core+ assets. I think in board meetings, we had a lot of discussions about the aging population and the consequences. Senior homes became an interesting asset class as a consequence. We also discussed a lot the behaviours of Millennials. What I see now in board meetings that we are discussing, beside these topics, which remain key, we are also discussing the long-term effects of this current situation. Um, I think that now investors have a clear idea which asset class they want to allocate their capital. What is interesting is that, besides the asset class, the geographic location of the assets are still very important factors to consider. If you take the example of the Polish office market, I think we saw that during the first half of the year that transactions didn't slow down there because of the office sector, the lower salaries compared to other European countries and the highly skilled workforce. That country and these assets remain very, very popular. And we see that during board meetings that, more and more, you know, the asset classes have been defined and the board is switching the focus on the geographic location of the assets and how they can benefit from growing population, for example.
Thanks Tamas. I'd like to expand on one area you discussed there, the board meetings. Can I ask you, as a non-exec director, can you talk a little bit about common themes and pressing issues you’re seeing in board meetings, or that your peers might see today?
I think that, in general, directors have been very proactive during the last couple of months. I've seen many board meetings that were convened by the directors. They were the ones initiating the discussions. Um, I also saw board members commenting more often these days on board minutes. They really want to ensure that the minutes reflect the discussions of the board meetings when they have a question that they think is important from the view of the company, that they really want to make sure that this question is reflected in the minutes. Now in terms of the pressing issues, obviously valuation remains key. I think in the third quarter, we will see, unfortunately, some unfavourable reports that some of the boards will challenge. And this will be a very interesting period from that perspective. The lack of cash in some of the structures – that is also a pressing issue. Board members need to team up and decide what to do. In most of the cases they are calling for additional capital and they need to make sure that they document these capital calls and they have a board meeting where they explain the need for extra capital and why they are calling this capital from their shareholders. Another thing is that in terms of regulatory deadlines, we've seen in March and April that regulators were extending certain filing deadlines. The implementation of DAC6 was also delayed. And now these extensions are coming to an end. And even for DAC6, we saw that earlier this month in Germany, it has been implemented. So this is also something that the board should be monitoring and keeping an eye on. What I also see in some of the board meetings, and I must say I like it a lot – some of the asset managers are presenting to the board best case, most likely case and worst case scenarios, whether the budget will be met and, if not, then according to these scenarios where they will land by the end of the year. This is very helpful for the board, and this is exactly what the board needs to take decisions and make sure that during the remaining part of the year, they will have, for example, sufficient cash in the structure to pay the third party debtors.
Great, Tamas, thank you for that. And I think you touched a little bit what I was going to ask next around technology. In every sector, technology has clearly played a key role during COVID-19. Can you talk about what the role of technology has been, specifically on the governance side in real estate? And perhaps also talk about what will stay if we go back, if there’s a vaccine and we go back to what is considered previous normal life.
Sure. And this is a very good question. I think technology is very important also from a governance perspective. We've seen during the last couple of months that these board meetings, remote board meetings were had instead of just by a phone calls. These are held through Zoom, Skype or other applications. I think this is a huge step forward. These board meetings make sure that, uh, the discussions can be very interactive and board members can really stimulate discussions. Now, I think it's important to mention that there are specific tools available on the market to facilitate these board meetings. So these tools are designed for board meetings and shareholder meetings. Just some of the advantages to mention, for example, is that when you convene the meeting, all the board members, they receive a notification that there will be a board meeting. It goes into their calendar automatically. They get a notification also when there's an update, when a work pack has been uploaded or when there is a last minute change, for example, to the board pack. There is no more need for emails. The system will send out these emails automatically. What is very important and can become even more important in the future is that these applications can register the vote of the board members or the shareholders, meaning that if something goes wrong later on in the structure, it's very easy to trace back who approved the transaction and who was against the transaction. Another big advantage in my opinion of these tools is that later on if when is a share deal – although there are less and less share deals, more and more asset deals, but if there is a share deal – then during the due diligence it's very easy to check how often board meetings were held and what exactly was discussed during those board meetings. Another area I think when we talk about technology is digital signatures that we should mention here. I think when we went into this sort of crisis, we were all using simple electronic signatures. Both me and my fellow board members were signing documents remotely, but simply copy-pasting our signatures into documents. Now there are more advanced techniques than that. So, um, a more sophisticated system is the so-called advanced signatures that provides for unique link to the signatory. And also it has the capability of identifying the signatory. The creation of the signature is solely linked to the signatory. And that's also a big difference compared to the simple e-signatures. These are encrypted and therefore these are prevented from any tampering or alteration. I think that we and the industry itself moved away sort of from the simple e-signatures and we are using more and more often these advanced technologies. There is one level that is even higher up in terms of sophistication, and these are the qualified electronic signatures. We are not there yet in general, but I think in the future, we will see that these qualified signatures will become very popular. These are also specific digital signatures that meet certain government specifications. So in other words, the governments, they accept and even promote the use of these qualified signatures, making it even safer for directors to sign documents.
That’s great, Tamas, thank you for that. Can you maybe share with us some specifics, maybe important areas, you’ve observed in Luxembourg – as the head of Luxembourg real estate for IQ-EQ? It would be remiss of us not to ask you.
Sure. Um, well, first of all, there is the Danish ECJ case from last year. In short, Danish companies were paying either dividends or interest to their EU parent companies and the European Court of Justice ruled actually that holding companies were not the beneficial owners of these payments and therefore dividend withholding tax was levied, or interest withholding tax in some of the cases. Now, um, the basis of their decision was – and that's important in the context of the current crisis – that the companies who were receiving these incomes were lacking of economic substance, and they all carried out very limited activities in their jurisdictions. They also argued that actually these companies were receiving, who were receiving the income, did not have the right to freely use and enjoy the received sums, and because of various contracts existing between the companies and their shareholders, they had to upstream it immediately, these incomes. And this is important now because what I see quite often in real estate structures these days is that one arm of the structure is still generating cash, but we need cash in other parts of the structure. And then the solution is that we upstream the available cash in the structure, and then downstream to the companies which are in need of cash. And when we upstream the dividends or interest income, it's very important. This is the liability of the directors to ensure actually that we are the company who's receiving the dividend. These companies are the beneficial owners of these incomes. So they need to make sure that all of these upstreams are perfectly documented, there is a proper board meeting. Directors should stay away from written circular resolutions when it comes to these upstreams because they can run into issues. And we saw that actually already last month. There was a case in Spain, which confirmed the European Court of Justice interpretation of the concept of beneficial ownership and therefore the withholding tax exemption was not allowed. Again, putting the liability back to the directors. The other thing probably I would like to mention is substance. So we are obviously holding these meetings due to travel restrictions via either phone calls or video conferences or those platforms that I mentioned earlier. Obviously these are not physical meetings, but it remains key that the base of effective management is in Luxembourg, in Jersey or wherever clients and asset managers are setting up their structures. So substance should always be considered. And once we can travel freely, once it is safe to travel and meet with others again, it's very important that we go back to physical board meetings, especially when we are discussing strategic decisions.
Tamas, and I think that substance point also reflects about the electronic signatures. You have to be very careful with those depending where you're physically located. Legal advice is also recommended, I would say here.
Absolutely. And this is a very good point as well, indeed. I also strongly encourage all the clients and also directors to seek legal advice. This is a complex situation, and we need to make sure that we are not jeopardising the substance of our entities.
Thank you for that. And Tamas, before we leave you, is there anything else you would like to share with us that we might've not covered? Any positive impacts for learnings perhaps from COVID-19?
Yes, absolutely. I mean, first of all, the outlook remains positive. You know, we see pension funds allocating more from their portfolio to real estate. We know that there's a lot of dry powder available on the market and investors are waiting at the moment and probably are not pursuing deals at the moment, but this will change and real estate will become really high on the radar of asset managers and real estate will thrive going forward. I'm really convinced about that. The other interesting thing for me, and I see that during board meetings as well, ESG remained a very important topic – so regularly during board meetings the ESG aspect of the platform is discussed. And I think it's important for directors to bring this up, even if we are facing a cashflow issue. For example, even if we are challenging a valuation, we should never forget about ESG. ESG should always, always be on the agenda of quarterly board meetings, for example. Um, and also I think going forward it will be key that directors discuss the reporting of ESG. This is something that investors will want to see. They want to see numbers. They want to see how exactly we are dealing with ESG. And this will be the liability of the directors and already now they should be looking for tools for this reporting.
Thank you very much Tamas for your time today, and for sharing your insights with us. And thank you to everyone for taking the time to listen and tune in. If you have any questions on anything we discussed or anything beyond, please feel free to reach out directly to Tamas and myself and we'll be happy to continue the conversation. Thank you and goodbye.
Thank you very much, Tom. And thanks everyone for tuning in today.