📢CySEC CIRCULAR C684: REAL ESTATE RISKS & FUND MANAGER OBLIGATIONS

​On the 26th of February 2025, the Cyprus Securities and Exchange Commission (CySEC) issued Circular C684, addressing Alternative Investment Fund Managers (AIFMs) and UCITS Management Companies. This circular pertains to the European Systemic Risk Board's (ESRB) Recommendation 2022/9, which focuses on vulnerabilities within the commercial real estate (CRE) sector across the European Economic Area (EEA). ​

Background on ESRB Recommendation 2022/9

The ESRB's Recommendation 2022/9, issued on the 25th of January 2023, emphasises the need for enhanced monitoring and mitigation of systemic risks stemming from the CRE sector. The ESRB identified several vulnerabilities that could adversely impact financial stability and the broader economy, including:​

• Cyclical Risks: Heightened inflation, tightening financial conditions limiting refinancing options, and a deteriorating economic outlook following geopolitical tensions, such as Russia's invasion of Ukraine

• Structural Changes: Impacts from climate-related economic policies, stricter building standards, and a shift towards e-commerce. Additionally, the COVID-19 pandemic has accelerated the demand for flexible office spaces due to the rise of remote and hybrid working models

The ESRB's analysis indicates that adverse developments in the CRE sector can have systemic implications for both the financial system and the real economy. Such vulnerabilities can be amplified by cross-border spillovers and interlinkages between financial institutions. ​

Implications for AIFMs and UCITS Management Companies

In light of these identified vulnerabilities, CySEC's Circular C684 serves to inform AIFMs and UCITS Management Companies about the ESRB's recommendations. The circular underscores the importance of:​

• Enhanced Monitoring: Implementing robust systems to monitor systemic risks arising from the CRE sector. This includes collecting and analysing relevant data to identify potential threats to financial stability

• Ensuring Sound Financing Practices: Adopting prudent lending standards and risk management practices to mitigate exposure to CRE-related risks

• Increasing Resilience: Strengthening the resilience of financial institutions against potential materialisation of CRE risks

By adhering to these guidelines, AIFMs and UCITS Management Companies can better navigate the complexities of the CRE market and contribute to the overall stability of the financial system.​

Circular C684 highlights the critical importance of addressing vulnerabilities in the CRE sector. AIFMs and UCITS Management Companies are encouraged to align their practices with the ESRB's recommendations to ensure robust risk management and contribute to financial stability within the EEA.