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rics.org/guidance RICS guidance note RICS professional standards and guidance, Europe Real estate risk management under the Alternative Investment Managers Directive (AIFMD) 1st edition, November 2017

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Page 1: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

rics.org/guidance

RICS guidance note

RICS professional standards and guidance, Europe

Real estate risk management under the Alternative Investment Managers Directive (AIFMD)1st edition, November 2017

Page 2: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

RICS guidance note, Europe

1st edition, November 2017

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square

London

SW1P 3AD

UK

www.rics.org

No responsibility for loss or damage caused to any person acting or refraining from action as a result of the material included in this publication can be accepted by the authors or RICS.

Produced by the Luxembourg Professional Group Board, with the support of Ben Elder, Global Valuation Standards Director, of the Royal Institution of Chartered Surveyors.

ISBN 978 1 78321 207 1

© Royal Institution of Chartered Surveyors (RICS) November 2017. Copyright in all or part of this publication rests with RICS. Save where and to the extent expressly permitted within this document, no part of this work may be reproduced or used in any form or by any means including graphic, electronic, or mechanical, including photocopying, recording, taping or web distribution, without the written permission of RICS or in line with the rules of an existing licence.

Typeset using Typefi.

rics.org

Copyright acknowledgment

The extract from the INREV Style classification snapshot is reproduced with permission from INREV.

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Acknowledgments

RICS would like to thank the following for their contributions to this guidance note:

Co-authors

Frederik Leser MRICS (Pancura)

Julien Sporgitas MRICS (Altus Group)

Jean-Eric Vimont MRICS (JEV IM)

Jürgen Wiegand MRICS.

Working group

Keith Burman FRICS (MPL Group)

Jean-Philippe Carmarans MRICS (DTZ)

Karl Delattre FRICS (Cromwell Property Group)

Alessandro Carlo Garavaglia (Invesco Real Estate Management)

Blazena Grossmann MRICS (Hines)

Fiona Haggett FRICS (RICS)

Seppo Koponen MRICS (Seppo Koponen Consulting)

Wenceslas Moussa (Aviva Investors)

Zsolt Toth (RICS)

Wendy Verschoor FRICS (CBRE).

RICS Professional Groups lead

Ben Elder FRICS

RICS Publishing

Head of Publishing and Content: Sarah Crouch

Standards Publishing Manager: Antonella Adamus

Standards Publishing Project Manager: Georgia Brambilla

Editor: Ruth Wilkie

ii RICS guidance note, Europe Effective from 1 March 2018

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

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Contents

Acknowledgments �������������������������������������������������������������������������������������� ii

RICS professional standards and guidance �������������������������������������������� 1

1 Introduction ������������������������������������������������������������������������������������������ 3

1.1 Purpose ....................................................................................... 3

1.2 Target audience ........................................................................... 3

1.3 Effective date ............................................................................... 3

2 The role of the AIFM real estate risk manager ��������������������������������� 4

2.1 Main tasks and key challenges ..................................................... 4

2.2 Types of controls performed by the AIFM real estate risk manager ...................................................................................................... 4

3 Defining the approach of the AIFM real estate risk manager ��������� 5

3.1 Identifying key risks ...................................................................... 5

3.2 Tailoring the AIFM real estate risk management framework .......... 5

3.3 Considering the life cycle of a real estate investment .................... 6

4 Implementing valuation controls �������������������������������������������������������� 7

4.1 Independent valuation review process ......................................... 7

4.2 Scope and frequency of independent valuation review ................ 7

4.3 AIFM real estate risk manager involvement .................................. 7

5 Conclusion ������������������������������������������������������������������������������������������� 8

Appendix A: Core office risk matrix ���������������������������������������������������������� 9

Asset level risks (unlevered and levered) ................................................. 9

Fund level risks ..................................................................................... 13

Appendix B: Glossary ������������������������������������������������������������������������������� 15

rics.org

iiiRICS guidance note, EuropeEffective from 1 March 2018

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RICS professional standards and guidance

RICS guidance notesThis is a guidance note. Where recommendations are made for specific professional tasks, these are intended to represent ‘best practice’, i.e. recommendations that in the opinion of RICS meet a high standard of professional competence.

Although members are not required to follow the recommendations contained in the guidance note, they should take into account the following points.

When an allegation of professional negligence is made against a surveyor, a court or tribunal may take account of the contents of any relevant guidance notes published by RICS in deciding whether or not the member acted with reasonable competence.

In the opinion of RICS, a member conforming to the practices recommended in this guidance note should have at least a partial defence to an allegation of negligence if they have followed those practices. However, members have the responsibility of deciding when it is inappropriate to follow the guidance.

It is for each member to decide on the appropriate procedure to follow in any professional task. However, where members do not comply with the practice recommended in this guidance note, they should do so only for good reason. In the event of a legal dispute, a court or tribunal may require them to explain why they decided not to adopt the recommended practice.

Also, if members have not followed this guidance, and their actions are questioned in an RICS disciplinary case, they will be asked to explain the actions they did take and this may be taken into account by the Panel.

In some cases there may be existing national standards that may take precedence over this guidance note. National standards can be defined as professional standards that are either prescribed in law or federal/local legislation, or developed in collaboration with other relevant bodies.

In addition, guidance notes are relevant to professional competence in that each member should be up to date and should have knowledge of guidance notes within a reasonable time of their coming into effect.

This guidance note is believed to reflect case law and legislation applicable at its date of publication. It is the member’s responsibility to establish if any changes in case law or legislation after the publication date have an impact on the guidance or information in this document.

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1Effective from 1 March 2018 RICS guidance note, Europe

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Document status definedRICS produces a range of professional standards, guidance and information documents. These have been defined in the table below. This document is a guidance note.

Publications statusType of document Definition Status

StandardInternational standard An international high-level principle-based standard

developed in collaboration with other relevant bodies.Mandatory.

Professional statementRICS professional statement (PS)

A document that provides members with mandatory requirements or a rule that a member or firm is expected to adhere to.

This term also encompasses practice statements, Red Book professional standards, global valuation practice statements, regulatory rules, RICS Rules of Conduct and government codes of practice.

Mandatory.

Guidance and informationRICS code of practice Document approved by RICS, and endorsed by another

professional body/stakeholder, that provides users with recommendations for accepted good practice as followed by conscientious practitioners.

Mandatory or recommended good practice (will be confirmed in the document itself).

Usual principles apply in cases of negligence if best practice is not followed.

RICS guidance note (GN)

Document that provides users with recommendations or approach for accepted good practice as followed by competent and conscientious practitioners.

Recommended best practice.

Usual principles apply in cases of negligence if best practice is not followed.

RICS information paper (IP)

Practice-based information that provides users with the latest technical information, knowledge or common findings from regulatory reviews.

Information and/or recommended best practice.

Usual principles apply in cases of negligence if technical information is known in the market.

RICS insight Issues-based input that provides users with the latest information. This term encompasses thought leadership papers, market updates, topical items of interest, white papers, futures, reports and news alerts.

Information only.

RICS economic/market report

A document usually based on a survey of members, or a document highlighting economic trends.

Information only.

RICS consumer guide A document designed solely for use by consumers, providing some limited technical advice.

Information only.

Research An independent peer-reviewed arm’s-length research document designed to inform members, market professionals, end users and other stakeholders.

Information only.

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

2 Effective from 1 March 2018RICS guidance note, Europe

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1 Introduction

The Alternative Investment Fund Managers Directive (AIFMD) has made risk management one of the fundamental functions for real estate investment funds. Although the Commission Delegated Regulation (EU) No 231/2013 supplementing the Directive (Level II) has further clarified the type of risks that need to be addressed for alternative assets, specific guidance on real estate risks has not yet been provided.

Given the importance of real estate for Europe’s alternative investment fund industry (according to the INREV Vehicles Universe Q2 2017, there are 456 funds with total gross assets under management of 280 billion euros), RICS Europe has produced this guidance note to provide guidance to AIFMs on risk management for real estate investment funds. The guidance note is the outcome of a thorough consultation with senior industry professionals responsible for risk management within tier one institutional real estate asset management firms. RICS and the authors of this guidance note would like to thank all contributors for their valuable feedback during several rounds of consultation.

For the avoidance of doubt, we would like to emphasise that this guidance note has been written from the perspective of the AIFM real estate risk management function. In accordance with the Directive, the AIFM is responsible for the following three main functions:

• portfolio management

• risk management

• valuation.

In most cases, AIFMs will be supported by either a portfolio manager or an investment advisor to fulfil their day-to-day duties in relation to portfolio management (respectively through a delegation of the portfolio management function or an outsourcing of different investment management tasks via a service agreement). Moreover, it is clear that real estate risk management (e.g. with respect to risks at the level of real estate assets, portfolios and funds) is already embedded in the day-to-day duties and responsibilities of investment advisors. In this context, the role of the AIFM risk management function will be to ensure proper oversight of day-to-day risk management performed by the investment advisor and either executing or overseeing existing controls, including independent reviews and assessments of the work performed by the investment advisor.

This guidance note therefore assumes that risk management is generally implemented through three lines of defence:

• the investment advisor or portfolio management function as first line of defence

• the AIFM risk management function as second line of defence and

• the internal audit function of the AIFM as third line of defence to ensure that the overall internal control system and risk management framework operate effectively.

1.1 PurposeThe purpose of the guidance note is to:

• create a standard library of real estate industry risks

• develop specific guidance on real estate risk management to assist AIFMs on questions such as:

– what the role of the AIFM real estate risk manager is

– what the specific checks and controls that need to be implemented by the AIFM risk manager are

– how to identify key risks for the various property sectors and real estate investment styles

– which type of risks should be emphasised throughout the real estate investment life cycle (i.e. acquisition, holding, disposal phase)

• provide an example of an AIFM real estate risk management framework for a direct European core office fund (Appendix A: core office risk matrix).

It is anticipated that the AIFM real estate risk management framework in Appendix A could serve as a basis for real estate funds investing in other real estate sectors and/or applying different investment styles.

A glossary is provided in Appendix B for information purposes.

1.2 Target audienceThis guidance note is relevant to:

• RICS members

• real estate professionals and

• the wider AIFM stakeholders’ community, including AIFM real estate risk managers, investment/portfolio managers, investment advisors, investment/valuation committee members, board members and investors.

1.3 Effective dateThis guidance note is effective from 1 March 2018.

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3Effective from 1 March 2018 RICS guidance note, Europe

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2 The role of the AIFM real estate risk manager

2.1 Main tasks and key challengesThe main tasks to be fulfilled by the AIFM real estate risk manager can be summarised as follows:

• identify key risks and determine key risk indicators

• set limits/thresholds for key risk indicators in accordance with the risk profile of the fund

• measure or monitor key risk indicators

• perform or supervise stress tests and sensitivity analysis on given key risks

• monitor risk mitigating steps and follow up on remedial actions in case of exceptions or breaches

• report to the board of the AIFM (highlighting exceptions and remediation actions) and

• ensure that appropriate risk management disclosures are made to investors and the required risk reporting is provided to regulators.

To fulfil these tasks, the AIFM real estate risk manager needs to have a clear understanding of the underlying real estate assets and the investment strategy of the fund. He or she also needs to have the ability to interact with various stakeholders (e.g. fund manager, fund controller, asset/portfolio manager, investment advisor, property manager, etc.) in order to address questions timely.

Furthermore and in compliance with the AIFM Directive, it is important to note that the AIFM real estate risk manager has timely access to all relevant reports that exist within the organisation in order to perform its duties effectively.

In this context, the board of the AIFM acts as escalation point.

2.2 Types of controls performed by the AIFM real estate risk managerThe types of controls generally fall into two categories:

• Controls based: the AIFM real estate risk manager leverages off existing controls implemented by the first line of defence that cover the various activities of the fund (e.g. acquisition, asset/portfolio management, debt management, etc.). It requires the AIFM real estate risk manager to have a clear understanding of the roles and responsibilities of the various stakeholders of the fund (such as portfolio, asset and property managers, investment advisors and fund controllers) as well as a clear overview of the internal

reporting process. The AIFM real estate risk manager will need to ensure that the controls in place are appropriate, effectively documented and performed on a regular basis. Where there are control deficiencies, the AIFM real estate risk manager should discuss them with the relevant stakeholders and escalate/report any findings to the AIFM Board together with a remediation plan.

• Detailed testing: the AIFM real estate risk manager directly performs specific tests of detail. This covers activities such as investment restriction reviews, independent valuation reviews, performance calculation reviews, financial model reviews and stress testing. These specific tests usually include tasks such as:

– sample checks performed on specific reports (e.g. reconciliation, mathematical checks, accuracy, completeness and consistency)

– challenging key data by requesting and reviewing adequate supporting documentation (e.g. valuation assumptions, performance assumptions, etc.).

The frequency of controls (for both controls based and detailed testing) generally depends on the risk type, the characteristics of the fund (e.g. open-ended versus closed-ended, investor reporting requirements, etc.) and regulatory requirements. The AIFM real estate risk manager needs to prioritise tasks by assessing key risks based on his or her professional knowledge and experience.

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3 Defining the approach of the AIFM real estate risk manager

3.1 Identifying key risksThe characteristics of the underlying real estate assets are key in developing the AIFM real estate risk management framework. Therefore, a ‘bottom-up approach’ needs to be taken, with:

• a first phase focusing on key risks present at asset level (e.g. asset quality, quality of tenants, lease duration, valuation, etc.) and

• a second phase focusing on key risks present at fund level (e.g. investment restrictions, fund performance, tenant/industry concentrations, etc.).

It is useful to highlight that potential tax and legal risks associated with typical multi-layer real estate fund structures (i.e. fund-holdco-SPV) are usually considered as fund level risks.

3.2 Tailoring the AIFM real estate risk management frameworkGiven the variety of risk/return profiles in real estate, there is no ‘one-size-fits-all’ approach for real estate risk management.

One of the objectives of the AIFM real estate risk manager is to ensure that the risk profile of the underlying real estate assets (both individually and in aggregate) are in line with the investment style of the fund and risk appetite of its investors, so as to ensure that the AIFM is in alignment with its mandate.

3.2.1 Determining the investment styleThe investment style classification defined by INREV provides guidance to the AIFM real estate risk manager to differentiate between the main real estate investment

strategies (i.e. core, value-added, opportunity) according to indicators such as % loan-to-value (LTV) or % target return derived from income, as shown in the INREV table below.

3.2.2 Setting risk limits and thresholdsThe determination of quantitative and qualitative risk limits and thresholds enables the AIFM real estate risk manager to better tailor the risk management framework to the specific risk profile of a fund.

Such limits and thresholds are applied to key risk indicators, which (for some of them) are specific to a given property sector. Commonly used indicators for income-producing assets are, among others:

• % occupancy rate

• WALB (weighted average lease period until the first break option)

• % LTV and compliance with other debt covenant ratios (e.g. ISCR, DSCR)

• credit quality of tenants

• geographical, tenant and industry concentration.

The standard set of key risks is fairly similar for most income-producing real estate assets regardless of the property sector. For example, an LTV ratio or a WALB will be common key risk indicators across the different property sectors. However, certain business risks can be sector specific, such as % turnover rent or the occupancy costs-to-sales ratio for a retail asset.

As the case may be and in accordance with INREV investment style classification, European core office funds might opt for an up to 5% (re)development investment exposure. Commonly used key risk indicators for (re)development projects are, for example:

• % of pre-let rentable area

• credit quality of developer.

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5Effective from 1 March 2018 RICS guidance note, Europe

Core

≤ 40%

Core

> 40%Value added Opportunity

Target percentage non-income producing investments

≤ 15% > 15% – ≤ 40% > 40%

Target percentage of (re)development exposure

≤ 5% > 5% – ≤ 25% > 25%

Target return derived from income

≥ 60%

Maximum LTV ≤ 40% > 40% > 40% – ≤ 60% > 60%

The above table from the INREV Style classification snapshot is reproduced with permission from INREV.

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3.3 Considering the life cycle of a real estate investmentThe life cycle of real estate investments – from acquisition to holding and disposal phase – has a great influence on key concerns, risks and priorities of the AIFM real estate risk manager.

3.3.1 Acquisition phaseGiven the inherent illiquidity of real estate assets, a particular focus should be given at the acquisition stage.

The key objectives of the AIFM real estate risk manager at the acquisition stage are:

• to ensure that the risk profile of the target investment is aligned to the investment style and risk profile of the fund and

• to identify any issues from the due diligence that need to be addressed prior to the closing of the acquisition and reported to the investment committee or the board of the AIFM.

In order to achieve this, the AIFM real estate risk manager will usually adopt a controls based approach focusing on tasks performed by the investment advisor on key areas such as:

• legal, tax, financial, environmental and technical due diligence findings (ensuring that all potential risks have been identified and properly reported)

• asset valuation (ensuring that target assets have been properly valued, in accordance with market standards, and that underlying valuation assumptions are reasonable) – it is considered to be best practice for European core real estate investment funds to value real estate prior to the acquisition

• key portfolio ratios and indicators (ensuring that key metrics are in line with targets and the investment style of the fund, e.g. debt covenants, WALB, vacancy, internal rate of return, etc.)

• reporting on the sustainability characteristics of the asset, including social aspects (ensuring assessment of obsolescence risk)

• coordination and review of legal agreements.

It is therefore fundamental for the AIFM real estate risk manager to be involved in the early stages of the acquisition process and to perform the initial risk assessment before the letter of intent is issued, and the detailed risk assessment before the transaction is subsequently approved by the investment committee and/or the AIFM. Furthermore, the AIFM real estate risk manager should ensure that key risks have been appropriately addressed and documented in the investment memorandum supporting the acquisition.

3.3.2 Holding phaseDuring the holding phase the priority of the AIFM real estate risk manager changes towards monitoring the effectiveness of existing controls to mitigate risks that have

been identified during the initial due diligence or that may occur during the holding period.

Moreover, monitoring and reporting on potential changes (e.g. with respect to the overall performance of the fund) or breaches of risk limits or thresholds and following up on potential remedial actions is central to the role of the AIFM real estate risk manager in this phase. The frequency of the risk analysis could vary by product, but it is reasonable to link it to the NAV calculation frequency. Stress testing and back testing techniques are used to support the monitoring and assessment exercise. These assessments should be conducted at least on a yearly basis.

3.3.3 Disposal phaseDuring the disposal phase of assets and the liquidation and wind up of the fund thereafter, the AIFM real estate risk manager will usually again adopt a controls based approach focusing on tasks performed by the investment advisor on key areas such as:

• timing of the disposal process and market value of the assets considering their liquidity, the business plan, the impact of the disposal on fund risk and the term of the fund

• due diligence on the selected bidders (e.g. solvency, reputation etc.)

• contractual obligations, guarantees and commitments resulting from the disposal/ liquidation process.

The AIFM real estate risk manager should ensure that such key areas have been appropriately addressed and documented in the disposal memorandum supporting the transaction.

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

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4 Implementing valuation controls

4.1 Independent valuation review processGiven that the AIFM is responsible for the valuation of the assets of the fund, the AIFM real estate risk manager needs to ensure that an independent, transparent and documented valuation review process is implemented irrespective of the valuation model adopted by the AIFM (internal v external valuation model) and the related impacts on liability (see article 19 of the Directive 2011/61/EU and also refer to the RICS Briefing Note dated February 2015 on Valuations in accordance with the Alternative Investment Fund Management Directive, available at www.rics.org/Documents/Alternative%20Investment%20Fund%20Managers%20Directive.pdf).

The valuation review process should also be independent from the portfolio management function as well as from the investment advisor and should at least include the following tasks:

• checking the independence (e.g. organisational charts, remuneration policy, past appointments, conflicts of interest, etc.) and competence/professional qualifications (e.g. RICS Registered Valuer accreditation) of the external appraiser

• ensuring that the appointment of the external appraiser complies with local regulatory requirements and professional standards (e.g. IVS and RICS Valuation – Global Standards, the ‘Red Book’)

• checking the accuracy and completeness of the valuation source data provided by the property/asset manager to the external appraiser (i.e. rent rolls, capex budgets, etc.)

• checking the accuracy, consistency and completeness of the external appraisers’ report, and in particular the rationale used to select the valuation methodology/model(s) and the documentation supporting the underlying valuation assumptions (such as comparables for example)

• reviewing the value changes (or the absence thereof) between two review cycles.

The consistency of the valuation methodology over time and across the various assets of the fund should also be checked by the AIFM real estate risk manager.

4.2 Scope and frequency of independent valuation reviewThe scope (i.e. limited or full review) and frequency of the independent valuation review will depend on the characteristics and reporting requirements of the fund (i.e. open-ended v closed-ended, frequency of property valuation, frequency of NAV calculation and of investor

reporting, etc.). However, the frequency of the review should at least be annual.

4.3 AIFM real estate risk manager involvementIt is of paramount importance for the AIFM real estate risk manager to be involved in the various steps of the independent valuation review process by either performing the review him or herself (if the appropriate competence and skills are in place) or by having proper oversight on the review process performed by an independent third party reviewer.

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5 Conclusion

The set-up of the AIFM real estate risk management function might be specific in each and every real estate business organisation, as it depends, for example, on the size of the organisation, the amount of assets under management and the available resources.

On the other hand, there is no doubt that AIFMD has increased the need for qualified and industry-knowledgeable personnel at the level of the AIFM, which is

of paramount importance to properly carry out its duties, notably with respect to risk management. Indeed, AIFMs are facing increased pressure and scrutiny to demonstrate appropriate substance, independent controls and oversight. This currently represents a challenge for AIFMs looking to hire staff with adequate real estate competence, skills and experience.

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

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9Effective from 1 March 2018 RICS guidance note, Europe

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Page 14: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

10 Effective from 1 March 2018RICS guidance note, Europe

Risk

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Page 15: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

rics.org

11Effective from 1 March 2018 RICS guidance note, Europe

Risk

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sset

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anal

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m t

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vest

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Dur

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port

Page 16: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

12 Effective from 1 March 2018RICS guidance note, Europe

Risk

cat

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yRi

skKe

y ri

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)

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Fund

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cqui

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prop

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Page 17: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

rics.org

13Effective from 1 March 2018 RICS guidance note, Europe

Fund

leve

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ity

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cur

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urre

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hedg

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arra

ngem

ents

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ing

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e: o

btai

n an

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view

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ort

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kCu

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res

ulti

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ctua

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ies

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it ri

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arty

risk

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ility

to

draw

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n un

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mm

itm

ents

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it q

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to c

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.)

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iew

pro

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(e.g

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to

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vest

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rmat

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on%

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itor

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/fina

ncia

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trat

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and

issu

e ‘a

sset

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l re

port

’ to

fund

man

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cqui

siti

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impa

ct o

f acq

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os

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ndus

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ith

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tax)

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ML

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tain

and

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view

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impl

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tati

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ctio

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an

Wro

ng o

r ine

ffec

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op

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es

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as

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ext

erna

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ovid

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rols

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orti

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elay

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# in

cide

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per

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riod

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-com

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h op

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oces

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ach

of in

vest

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t re

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s de

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gal f

und

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men

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on

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ach

in in

vest

men

t res

tric

tion

s fo

rese

en in

lega

l fun

d do

cum

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tion

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cqui

siti

on: p

ortf

olio

man

ager

to

chec

k al

ignm

ent

wit

h in

vest

men

t res

tric

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s

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in

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edia

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act

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)

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trol

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vest

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se: o

btai

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d re

view

fu

nd c

ontr

olle

r rep

ort

Page 18: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

Real estate risk management under the Alternative Investment Fund Managers Directive (AIFMD)

14 Effective from 1 March 2018RICS guidance note, Europe

Risk

cat

egor

yRi

sks

Key

risk

in

dica

tors

(KRI

s)Ri

sk d

escr

ipti

on/

expl

anat

ion

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cted

con

trol

s/pr

oces

ses

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ks to

be

perf

orm

ed b

y th

e AI

FM R

M

Liqu

idit

y ri

skIn

abili

ty t

o m

eet

inve

stor

red

empt

ion

requ

ests

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idit

y st

ress

tes

t co

nclu

sion

s

Impa

ct o

f inv

esto

r pr

ofile

s

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reas

e in

liqu

idit

y of

ass

ets

resu

ltin

g in

diffi

cult

ies

to d

ispo

se

the

asse

t in

view

of m

eeti

ng

inve

stor

red

empt

ion

noti

ces

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uenc

y of

inve

stor

red

empt

ion

requ

ests

, e.g

. fro

m F

oFs,

mig

ht

tend

enti

ousl

y be

hig

her c

ompa

red

to r

edem

ptio

n re

ques

ts fr

om

pens

ion

fund

inve

stor

s

At a

cqui

siti

on:

*Liq

uidi

ty o

f ass

ets

to b

e an

alys

ed b

y tr

ansa

ctio

n te

am a

nd r

epor

ted

in ‘i

nves

tmen

t com

mit

tee’

pap

er

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d in

vest

or p

rofil

es t

o be

ana

lyse

d an

d re

port

ed

by fu

nd m

anag

er (r

edem

ptio

n co

ntro

l pro

cess

in

plac

e fo

r ope

n-en

ded

fund

s)

*Liq

uidi

ty s

tres

s te

st t

o be

init

iate

d by

fund

man

ager

(e

stim

atio

n of

red

empt

ion

requ

ests

and

fres

h m

oney

, e.

g. v

ia n

ew in

vest

ors)

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ing

hold

ing

and

disp

osal

pha

se:

*Liq

uidi

ty o

f ass

ets

to b

e m

onit

ored

by

asse

t/po

rtfo

lio m

anag

er a

nd r

epor

ted

to fu

nd m

anag

er

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nges

in a

lloca

tion

of f

und

inve

stor

pro

file

mon

itor

ed a

nd r

epor

ted

by fu

nd m

anag

er

(red

empt

ion

cont

rol p

roce

ss in

pla

ce fo

r ope

n-en

ded

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s)

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uidi

ty s

tres

s te

st t

o be

init

iate

d by

fund

man

ager

(e

stim

atio

n of

red

empt

ion

requ

ests

and

fres

h m

oney

, e.

g. v

ia n

ew in

vest

ors)

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cqui

siti

on:

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iew

, com

men

t and

sig

n off

the

‘inv

estm

ent

com

mit

tee’

pap

er p

rior

to

tran

sact

ion

appr

oval

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iew

and

com

men

t on

fund

inve

stor

pro

file

and

on

liqui

dity

str

ess

test

Dur

ing

hold

ing

and

disp

osal

pha

se:

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ain

and

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ew a

sset

/por

tfol

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epor

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inve

stor

pro

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on

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dity

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ess

test

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rnal

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ncin

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ledg

e of

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s-co

llate

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atio

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ets

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cqui

siti

on: e

xter

nal fi

nanc

ing

guar

ante

es t

o be

str

uctu

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by t

rans

acti

on t

eam

and

rep

orte

d in

‘in

vest

men

t com

mit

tee’

pap

er

Dur

ing

hold

ing

phas

e: fu

nd c

ontr

olle

r to

mon

itor

st

atus

of i

ssue

d gu

aran

tees

and

rep

ort t

o fu

nd

man

ager

(in

clud

ing

rem

edia

tion

act

ions

)

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ispo

sal:

exte

rnal

fina

ncin

g gu

aran

tees

to

be

rest

ruct

ured

by

tran

sact

ion

team

and

rep

orte

d in

‘in

vest

men

t com

mit

tee’

pap

er

At a

cqui

siti

on: r

evie

w, c

omm

ent a

nd s

ign

off t

he

‘inve

stm

ent c

omm

itte

e’ p

aper

pri

or t

o tr

ansa

ctio

n ap

prov

al

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ing

hold

ing

phas

e: o

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n an

d re

view

fund

co

ntro

ller r

epor

t

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ispo

sal:

revi

ew, c

omm

ent a

nd s

ign

off t

he

‘inve

stm

ent c

omm

itte

e’ p

aper

pri

or t

o tr

ansa

ctio

n ap

prov

al

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ter r

isks

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ry o

f lea

ses,

mat

urit

y of

loan

s at

the

sam

e ti

me

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cqui

siti

on: e

xpir

y of

leas

es a

nd m

atur

ity

of lo

ans

to b

e st

ruct

ured

by

tran

sact

ion

team

and

rep

orte

d in

‘in

vest

men

t com

mit

tee’

pap

er

Dur

ing

hold

ing

phas

e: fu

nd c

ontr

olle

r to

mon

itor

st

atus

of e

xpir

y of

leas

es a

nd m

atur

ity

of lo

ans

and

repo

rt t

o fu

nd m

anag

er (

incl

udin

g re

med

iati

on)

At a

cqui

siti

on: r

evie

w, c

omm

ent a

nd s

ign

off t

he

‘inve

stm

ent c

omm

itte

e’ p

aper

pri

or t

o tr

ansa

ctio

n ap

prov

al

Dur

ing

hold

ing

phas

e: o

btai

n an

d re

view

fund

co

ntro

ller r

epor

t

Fina

ncia

l str

uctu

ring

Cas

h ou

t res

tric

tion

sS

truc

turi

ng a

nd e

xter

nal

finan

ce c

oven

ants

lim

itin

g ca

sh

dist

ribu

tion

s fr

om S

PVs

(cas

h tr

aps)

At a

cqui

siti

on: f

und

cont

rolle

r to

repo

rt r

estr

icti

ons

in ‘i

nves

tmen

t com

mit

tee’

pap

er

Dur

ing

hold

ing

phas

e: fu

nd c

ontr

olle

r to

mon

itor

cas

h ou

t pro

cess

es

At a

cqui

siti

on: r

evie

w, c

omm

ent a

nd s

ign

off t

he

‘inve

stm

ent c

omm

itte

e’ p

aper

pri

or t

o tr

ansa

ctio

n ap

prov

al

Dur

ing

hold

ing

phas

e: o

btai

n an

d re

view

fund

co

ntro

ller r

epor

t

Stra

tegy

risk

Alig

nmen

t of

perf

orm

ance

wit

h th

e bu

sine

ss p

lan

of t

he

fund

Bus

ines

s pl

an o

f the

fu

nd, c

ash-

on-c

ash

yiel

d, IR

R co

mpu

tati

on

Inab

ility

for t

he fu

nd t

o m

eet i

ts

finan

cial

tar

gets

Per

form

ance

mea

sure

men

t to

be a

sses

sed

by p

ortf

olio

man

ager

to

chec

k al

ignm

ent w

ith

inve

stm

ent s

trat

egy

and

repo

rted

in ‘i

nves

tmen

t co

mm

itte

e’ p

aper

(in

clud

ing

rem

edia

tion

act

ions

du

ring

hol

ding

pha

se)

At a

cqui

siti

on, d

urin

g ho

ldin

g ph

ase

and

at d

ispo

sal:

revi

ew r

easo

nabi

lity

of a

ssum

ptio

ns u

nder

lyin

g pe

rfor

man

ce c

alcu

lati

on a

s st

ated

in ‘i

nves

tmen

t co

mm

itte

e’ p

aper

Page 19: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

Appendix B: Glossary

AIF means any collective investment undertaking (including investment compartments thereof) that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which does not require authorisation pursuant to the UCITS Directive (undertakings for collective investment in transferable securities – Directive 2009/65/EC).

AIFM means an alternative investment fund manager as defined in article 1(46) of the AIFMD.

AIFMD means Directive 2011/61/EU of 8 June 2011 of the European Parliament and of the Council on alternative investment fund managers as amended from time to time (available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF).

Counterparty risk means the risk of loss resulting from a counterparty to a transaction defaulting on its contractual obligations prior to the final settlement of the transaction (replacement risk).

Concentration risk means the risk of adverse effects on the value of the portfolio of an AIF arising from lack of diversification/large position in a single asset or market exposure.

Delegated Regulations means Delegated Regulations (EU) no 231/2013 of 19 December 2012 of the European Commission supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (known as Level II).

External appraiser refers to the third party independent appraiser performing the valuation irrespective of whether or not the external valuer role has been accepted as per article 19 of AIFMD.

INREV means the European Association for Investors in Non-Listed Real Estate Vehicles (www.inrev.org).

Investment advisor advises the AIFM portfolio management function regarding (dis)investments of assets of an AIF. Investment advisors do not make investment decisions. The responsibility for investment decisions lies with the AIFM portfolio management function.

KPI means key performance indicator.

KRI means key risk indicator.

Liquidity risk means the risk of the fund (in case of liquidity needs) not being able to liquidate its investments in a timely and cost-effective manner.

LTV means loan-to-value.

Market risk means the risk of a negative impact on the value of property as a result of changes in macro-economic and micro-economic factors as well as in capital markets.

Operational risk means the risk of loss resulting from inadequate processes and failures in relation to people and systems of the various service providers to the AIF or from external events, including legal and documentation risk (as such, it covers the risk resulting from the transaction, settlement and valuation procedures operated on behalf of the AIF).

WALB means weighted average lease period until the first break option.

rics.org

15Effective from 1 March 2018 RICS guidance note, Europe

Page 20: RICS professional standards and guidance, Europe Real ... · RICS professional standards and guidance RICS guidance notes This is a guidance note. Where recommendations are made for

EURO

PE/N

OVEM

BER

2017

/207

33/R

ICS/

RICS

GU

IDAN

CE N

OTE

Confidence through professional standardsRICS promotes and enforces the highest professional qualifications and standards in the development and management of land, real estate, construction and infrastructure. Our name promises the consistent delivery of standards – bringing confidence to the markets we serve.We accredit 125,000 professionals and any individual or firm registered with RICS is subject to our quality assurance. Their expertise covers property, asset valuation and real estate management; the costing and leadership of construction projects; the development of infrastructure; and the management of natural resources, such as mining, farms and woodland. From environmental assessments and building controls to negotiating land rights in an emerging economy; if our professionals are involved the same standards and ethics apply.

We believe that standards underpin effective markets. With up to seventy per cent of the world’s wealth bound up in land and real estate, our sector is vital to economic development, helping to support stable, sustainable investment and growth around the globe.

With offices covering the major political and financial centres of the world, our market presence means we are ideally placed to influence policy and embed professional standards. We work at a cross-governmental level, delivering international standards that will support a safe and vibrant marketplace in land, real estate, construction and infrastructure, for the benefit of all.

We are proud of our reputation and we guard it fiercely, so clients who work with an RICS professional can have confidence in the quality and ethics of the services they receive.

United Kingdom RICS HQ Parliament Square, London SW1P 3AD United Kingdom

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Media enquiries [email protected]

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Europe (excluding UK and Ireland)

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t +852 2537 7117 f +852 2537 2756 [email protected]

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t +91 124 459 5400 f +91 124 459 5402 [email protected]

Greater China (Shanghai)Room 4707-4708, 47/F Plaza 66, Tower 1, No. 1266, Nanjing Road West, Jing’an District, Shanghai, 200041, China

t +86 21 5243 3090 f +86 21 5243 3091 [email protected]

Japan Level 14 Hibiya Central Building, 1-2-9 Nishi Shimbashi Minato-Ku, Tokyo 105-0003, Japan

t +81 3 5532 8813 f +81 3 5532 8814 [email protected]

ASEAN #27-16, International Plaza, 10 Anson Road, Singapore 079903

t +65 6812 8188 f +65 6221 9269 [email protected]