EU property sector lobbying against €100bn regulatory hit

City A.M. Reporter
EUROPE'S property sector is lobbying regulators not to tighten the rules on interest rate swaps as it faces a possible €100bn (£84bn) hit from being lumped together with speculative investors.

The proposed European Market Infrastructure Regulation (EMIR) could devastate property companies, which would need to put up collateral when taking out an interest rate swap to secure a fixed rate for a loan, companies say.

"The ... sector must now engage with this issue and lobby for an exemption ... or face having to fully collateralise their interest rate swaps," Bill Bartram from risk advisers J.C. Rathbone Associates said at a panel discussion.

The rules, currently in the European parliament, would force financial counterparties such as banks and hedge funds to clear interest rate swaps through an external clearing house and not via private negotiation.

But it will also hit real estate investment trusts (REITS), which get tax benefits from distributing most of their profits in dividends and are required to hedge risk with a swap when getting a loan.

Clearing houses require counterparties to put up collateral, which could be too expensive for the real estate companies, which under the proposed rules also include funds holding real estate directly, and some private companies.

Peter Cosmetatos, finance director at the British Property Federation, which represents companies including Land Securities, Hammerson and British Land, said he thought the government shared the property industry's worries about EMIR.

The risks could be alleviated if the regulation explicitly exempted real estate funds and pre-existing contracts, he said.

"I think it would be ironic and disastrous if measures that are intended to improve market stability caused serious market instability by imposing a cash requirement on businesses that have just about managed to cope," he said.

The property industry would be hit by an estimated €65bn cash call for collateral on interest rate swaps if the plans do not change, interest rate and currency risk adviser Chatham Financial said in a report in November.

Cosmetatos said it was difficult to be precise about how big the interest rate swap market for property was, but figures suggested a range of between €55bn and €100bn.