BRUSSELS-Proposed EU rules on derivatives could take $85.8 billion (€65 billion) of working capital away from Europe’s economy by requiring property businesses to collateralize interest rate hedges with cash, according to the locally based European Public Real Estate Association.
Businesses deemed to be financial entities must post cash collateral into margin accounts to provide cover against default. Non-financial businesses, which use derivatives for hedging commercial risks, are excluded. However, property firms risk being misclassified as financial and subject to the onerous margin calls.
“Using interest rate swaps to reduce uncertainty associated with fluctuating interest rates is critical to property businesses because interest payments are often their single largest expense, and funding is required over long time periods and different economic cycles,” says EPRA’s Gareth Lewis.
The regulation’s definition of financial counterparties derives from the upcoming Alternative Investment Funds Management Directive and its application to listed property firm remains unclear. “The consequences of being subject to rules designed for financial entities would be an immediate withdrawal of much-needed capital from a sector critical to Europe’s physical economy, and a reduced ability to manage financing risk,” he says.
Lower capital availability would translate into less development and regeneration, and an $85.8-billion (€65-billion) cut in available capital translates into the loss of 99,000 to 122,100 jobs across Europe, where Germany, France, Italy, and Spain account for 50% of commercial property debt.
Allan Saunderson is a managing editor of Property Investor Europe and a contributor to GlobeSt.com.
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