IPSX – Real Estate’s new stock exchange
IPSX – What is it?
In January last year the International Property Securities Exchange (IPSX) received Financial Conduct Authority (FCA) approval and was subsequently launched. It is the world’s first regulated securities exchange dedicated to commercial real estate assets (CRE Assets) and reflective of an industry-wide curiosity to find new ways to access capital markets.
The IPSX is an FCA Regulated market and the admission and trading of all financial instruments on the IPSX is done in accordance with the FCA’s sourcebook for Recognised Investment Exchanges. Accordingly, the IPSX is a “Recognised Investment Exchange”. The IPSX operates two markets:
i. IPSX Prime (Prime); and
ii. IPSX Wholesale (Wholesale).
Prime represents the IPSX’s core market and provides a platform for issuers to progress an Initial Public Offering (IPO) of shares in companies owning, developing or managing single (or, if approved, multiple) CRE Assets. Most Prime issuers have opted for a corporate entity to own the CRE Asset and then admit to the exchange a single asset REIT to access the tax benefits.
Contrastingly, Wholesale will focus on closely-held CRE Assets (such as joint-venture held assets) seeking onshore REIT status. It is aimed at professional and institutional retail investors.
IPSX has also clarified that neither market will be for property development companies. A Company will only be admitted if property development is, at most, an “ancillary” part of its business.
The stated aim for the IPSX is to mainstream investment into commercial property and provide a further asset class for retail investors, alongside cash equivalents, equities and bonds.
Perhaps surprisingly, given its scale and global nature, real estate is still deemed as an “alternative” asset class. As a result, commercial real estate investment has been typically dominated by large specialist investors such as sovereign wealth funds, private equity funds, or high net-worth individuals (acting individually or as a joint venture) who own whole (or very significant) interests in buildings. The upshot was that investment and direct ownership in Grade A commercial property was out of reach for most retail investors. These smaller investors have been limited to either:
- purchasing shares in major listed property companies with broad ranging businesses (e.g. British Land Company plc);
- REITs listed on the LSE which tend to have multiple assets, providing the investors with limited control; and
- units in open-ended property funds, which have suffered significant reputational damage following a “run” on a number of these funds in the immediate aftermath of the 2016 Brexit vote, as investors sought to withdraw capital from the UK prior to the property crash.
The above has meant it has been difficult, even for mid-sized funds, to achieve portfolio diversification when investing in this asset class. With the IPSX, smaller investors now have access and exposure to specific assets through listed companies holding single CRE Assets.
Liquid trading and Accessibility
The IPSX aims to provide a level of liquidity not seen in this asset class previously due to the freely tradeable nature of listed securities. By virtue of being listed and subject to specific IPSX and FCA rules – there is automatically greater transparency for investors too. The IPSX (as with all stock markets) also provides real time valuations of the companies (and therefore their CRE Assets) as opposed to appraisal based valuations considering historic transaction comparables – realistically only available to a highly restricted investor universe.
The IPSX will also reduce initial capital outlays. Retail investors are now able to gain exposure to specific real estate assets without having to acquire the whole building.
Speed is another important differentiator. The quick-fire sale, purchase and transfer of securities on a stock exchange is a marked improvement to the traditional method of privately brokered transactions that involve a time lag (often a number of weeks/months) between an CRE Asset being put on sale and completion of that sale.
In summary, the IPSX aims to overcome the inherent illiquidity and requirement for substantial financial commitment detailed above. Further, the IPSX seeks to be an invaluable tool in finding new money for this particular asset class.
Admittance & Eligibility
Predominantly, Prime is aimed at single asset issuers – i.e. an issuer who owns an underlying “Single Commercial Property Asset” in its totality. The definition of a “Single Commercial Property Asset” (SCPA) is a real estate asset that: (i) occupies a single geographic location or postal address; or (ii) comprises a single building or a group of co-located buildings.
The guidance released by IPSX also notes that a SCPA should be (i) of institutional grade; and (ii) have a market value in excess of £50m (increased to £100m for a Wholesale listing).
In terms of eligibility, those who regularly deal with publically listed companies will recognise the following criteria:
- an IPSX issuer must be duly incorporated and operating in accordance with all applicable laws and regulations in its place of incorporation;
- such issuer must comply with the corporate governance arrangements established by the IPSX (or otherwise report and explain any non-compliance);
- Admission must be for all (not some) of the financial instruments in a particular class and those financial instruments must (i) benefit from pre-emption rights on an issue of new shares for cash; (ii) be transferable and freely negotiable; and (iii) be eligible for electronic settlement in the central securities depositary;
- at least 25% of the shares to be admitted must be “free float” (so in public hands);
- an issuer must publish a prospectus;
- accounts of the issuer must be audited; and
- if the Company intends to deploy leverage, it must have a maximum loan to value of 40% at the expected date of admission.
It appears that, in meeting the above criteria, an IPSX issuer will meet a similar standard to that of a company attempting to admit securities to the Standard List of the Main Market – though there is scope for an issuer electing to meet the “premium listing” standard.
As well as the above, a company seeking to list on Prime must also appoint:
- a Lead Adviser: who has responsibility for assessing whether or not an applicant satisfies all the requirements for admission to the IPSX; and
- an Approved Valuer: which will be (a) a property company registered with the RICS, (b) approved by the IPSX, and (c) included on the list of Approved Valuers.
A full list of all the IPSX approved and vetted Advisory Members can be found here.
With respect to continuing obligations these are, again, a familiar suite of requirements that include:
- an issuer will need to retain an Approved Valuer;
- publishing annual and half-yearly valuation reports;
- complying with the applicable IPSX and RICS rules;
- manage conflicts of interests; and
- continued compliance with MAR and the Disclosure Rules and Transparency guidelines.
Case Study – Mailbox
The headline news story for the IPSX has been the recent listing of the new single-asset REIT which owns the Mailbox in Birmingham (Mailbox REIT). M7 Real Estate (a fund manager) owns 46% of the shares and has predicted that investors will receive a 5% dividend from “long-dated income streams, underpinned by very low-risk high profile tenants”.
The former Royal Mail sorting office is now comprised of a combination of office, retail and leisure space – with notable tenants including the BBC, Q-Park and Harvey Nicholls. It also receives income from car parking. It is a prime (excuse the pun) example of how an investor is able to develop a diversified property portfolio by simply investing in a REIT listed on the IPSX. Furthermore, especially in light of the current Covid-19 crisis, the security of investing in property (in this manner) is particularly attractive. Companies can only pay a dividend if they’re making profits, but they are always obliged to pay rent.
With the above in mind, commenting on the Mailbox REIT’s admission to the IPSX, Richard Croft (chief executive of M7 Real Estate) noted that “we expect lots of REITs to be listed in the course of the next few months”. Certainly, for non-professional/ non-institutional investors, the opportunity to own part of your local shopping centre is both exciting and provides greater incentive to physically visit the shopping centre – perhaps helping to halt the total shift to online platforms.
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