BRUSSELS-Proposed EU rules on derivatives could take $85.8billion (€65 billion) of working capital away from Europe’s economyby requiring property businesses to collateralize interest ratehedges with cash, according to the locally based European PublicReal Estate Association.

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Businesses deemed to be financial entities must post cashcollateral into margin accounts to provide cover against default.Non-financial businesses, which use derivatives for hedgingcommercial risks, are excluded. However, property firms risk beingmisclassified as financial and subject to the onerous margincalls.

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“Using interest rate swaps to reduce uncertainty associated withfluctuating interest rates is critical to property businessesbecause interest payments are often their single largest expense,and funding is required over long time periods and differenteconomic cycles,” says EPRA’s Gareth Lewis.

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The regulation’s definition of financial counterparties derivesfrom the upcoming Alternative Investment Funds Management Directiveand its application to listed property firm remains unclear. “Theconsequences of being subject to rules designed for financialentities would be an immediate withdrawal of much-needed capitalfrom a sector critical to Europe’s physical economy, and a reducedability to manage financing risk,” he says.

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Lower capital availability would translate into less developmentand regeneration, and an $85.8-billion (€65-billion) cut inavailable capital translates into the loss of 99,000 to 122,100jobs across Europe, where Germany, France, Italy, and Spain accountfor 50% of commercial property debt.

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AllanSaunderson is a managing editorof PropertyInvestor Europe and a contributor toGlobeSt.com.

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