Author: Nigel Gordon
Nigel Gordon, Partner, Fladgate LLP (firstname.lastname@example.org)
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.
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:
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.
The key requirements for admission to trading on IPSX Prime are:
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:
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.