IPSX approved as a regulated investment exchange

Nigel Gordon, Partner, Fladgate LLP (ngordon@fladgate.com)

On 9 January 2019 the Financial Conduct Authority approved the International Property Securities Exchange (IPSX) as a recognised investment exchange. IPSX is the world’s first dedicated exchange for real estate and will enable the Initial Public Offering (IPO) and trading of companies owning single commercial real estate assets. IPSX enables prospective issuers to bring to market an IPO of shares in companies which own underlying property assets, for example, a commercial office block that occupies a single geographic location or postal address; or comprises a single building or a group of co-located buildings.

Based on current discussions with potential issuers and subject to market conditions, IPSX expects that the first IPOs will launch from the end of Q1 2019 onwards.

What do property owners need to do in order to float on IPSX?

A property owner may decide to release capital from a property they own. Instead of selling the property in its entirety and losing any economic interest, they may choose instead to sell the property to a newly formed company, which has been established for the sole purpose of managing the asset. The economic returns of the company are then shared through securitisation of the company and the sale of its shares and, in exchange for the sale of the property asset, the original asset owner may receive cash and some shares in the company.

The company structure will determine the tax efficiency of the arrangement:

• if the company to be floated is a special purpose vehicle (SPV) which already owns the property asset then no transfer of the property asset will be necessary, and so no Stamp Duty Land Tax (SDLT) will be payable;
• if the company to be floated is not an SPV, then a transfer of the property asset to the SPV will be necessary and will trigger 100% SDLT (as with a private treaty transaction); and
• if the company to be floated also seeks to take advantage of the UK regime for real estate investment trusts (REITs) (providing tax efficient treatment of property rental income and capital gains), it will need to be admitted to a recognised stock exchange such as IPSX. .

What markets will IPSX have?

The main market operated by IPSX will be IPSX Prime.

IPSX will, in due course, also operate IPSX Wholesale. It is intended that IPSX Wholesale will meet the needs of professional real estate investors because it will allow a joint venture single asset to obtain REIT status in the United Kingdom by being admitted to a recognised investment exchange.

What are the requirements for a company to admit its securities to trading on IPSX Prime?

The key requirements for admission to trading on IPSX Prime are:

• IPSX expects that an underlying property asset should be of institutional grade (i.e. each property will generally have a market value in excess of £50 million);
• the company must appoint an IPSX lead adviser to support and manage the IPO process;
• the company must sell down a minimum 25% of the company’s shares at the point of admission;
• the company must appoint an IPSX approved valuer;
• the leverage in the company must not exceed 40%; and
• the company must issue prepare and submit a prospectus (which must include a valuation report) and other information to the UK Listing Authority, have audited accounts and meet the IPSX Admission and Disclosure Standards.

The benefits of an IPSX IPO

For the institutional real estate asset owner, IPSX provides an alternative public market option to a traditional private sale with the flexibility to retain an interest in the asset through a shareholding of the asset owning company.

For owner occupiers this functionality means that value can be released from strategic freehold assets without entering into a traditional sale and leaseback transaction or procuring a joint venture partner. Owner occupiers will also have the flexibility to retain an interest in the asset through a shareholding of the asset owning company. Corporate real estate assets can therefore be a source of capital to reduce debt and/or invest in the owner’s core business.

Some real estate assets are so valuable that few institutions are able to buy alone and private sale processes result in only one bidder submitting an offer to buy the asset. An IPSX IPO will allow an interest in high value real estate assets to be shared amongst many investors, thus potentially increasing the value obtained from those real estate assets.

Other benefits include:

• reducing sale/purchase timelines – an investor in an IPSX company will be able to buy/sell shares in that company (and thus in the underlying asset) very simply (and with a low transaction cost);
• extending the depth and diversity of the investor pool in commercial property – retail investors will be able to acquire shares in a company (as well as institutional investors) thus creating more liquidity in that company’s shares;
• valuation – there will be bi-annual valuations of the underlying asset and continuous market pricing for the company’s shares.
• active management and diversification – investors can make more informed decisions about their property investments as there will be granular detail about tenant covenants, lease terms, costs, distribution, management etc; and
• tax efficient for investors – IPSX shares are eligible for ISAs and SIPPS inclusion, which may encourage liquidity because of investment by retail investors.

Conclusion

Admission to IPSX Prime will not be suitable for all commercial real estate assets. Prospective issuers will need to consider, along with their advisers, a range of factors. These include market timing, the target investor mix, the percentage of shares to be in free float and the structure of the issuer entity.In our view, property owners and investors should seriously consider IPSX Prime. Investors will have a choice as to where they invest and have direct sight of the specific underlying property asset that their investment relates to, with clarity over the revenues and costs associated with it, typically also benefiting from the tax efficiency conferred by REIT status. The valuations of IPSX companies will be a function of the perceived risk adjusted return available as a dividend together with the embedded value of the asset and the quality/strategy of the company’s asset manager.

How Fladgate can help

Fladgate has extensive experience of capital markets and of all aspects of commercial property, including REITs. We are recognised for our expertise in both sectors. Fladgate also a tax group which is very experienced in dealing with corporate tax and property related tax and the interaction between both types of tax. We are therefore ideally placed to advise on all matters connected to IPSX.

If you would like to discuss IPSX and whether an IPO on IPSX might be suitable for you, please speak to your usual contact at Fladgate.