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What are the benefits and disadvantages of IPSX and the Mailbox IPO proved anything?

On 14 May 2021 Mailbox REIT plc became the first company to carry out an initial public offering on the International Property Stock Exchange (IPSX). In our post on 17 May 2021 we...

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Date: 23/06/2021

Authors:

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Nigel Gordon

Partner

On 14 May 2021 Mailbox REIT plc became the first company to carry out an initial public offering on the International Property Stock Exchange (IPSX).

In our post on 17 May 2021 we set out a summary of the two markets on IPSX, but what are the benefits and disadvantages of IPSX and what conclusions can be drawn from the Mailbox IPO?

The potential benefits of IPSX for property owners

Flexibility

A listing on IPSX provides flexibility. Owning property has many benefits, but is a long-term commitment and is therefore generally relatively inflexible. For example, it is not very easy to sell part-only of a property asset. Sales and leasebacks are possible, but would often involve the disposal of the entire asset. Another option is debt, but lenders may be wary of the gearing levels of businesses they feel might come under strain in coming years and borrowers may consider that the terms of any loan restrict their operations too much.

The Covid-19 pandemic and the uncertainty that has created in the property market (and in the wider economy) means that flexibility in property ownership is an advantage.

Access to capital

A company traded on IPSX can access capital by issuing shares without the restrictions typically associated with debt or the need to provide security.

Incentivisation of employees

IPSX shares one of the advantages of all listings i.e. it allows employees of property companies holding a stake in the vehicle, through the holding of shares and/or the grant of options. In other words, businesses can deal purely in flexible equity and not get tied down to restrictive debt arrangements, repayment and refinancing cycles or future risks associated with sale and leaseback deals.

The potential benefits of IPSX for investors

Transparency

One might ask why property owners or investors should consider IPSX in preference to other stock exchanges. IPSX’s answer to this is that its rules are specifically designed to require IPSX companies to disclose to the market all the details that an investor would to know in order to make a well-informed decision about investing. It is also likely to be the case that, because IPSX is for single real estate assets and multiple assets with commonality, the disclosures that IPSX companies make will provide more focussed information than the announcements of companies with disparate property portfolios.

Given the transparency afforded by rules of IPSX, investors will have a clear understanding of the buildings’ income and covenant strength and can make reasoned decisions in real time. This gives them the best option to invest in property without the risk of their money being locked away in assets that might no longer make sense as an investment proposition.

Liquidity

It is easier for investors to sell their shares in a property company traded on IPSX than to realise a direct interest in a property. There is also flexibility in how much of their interest an investor wants to sell i.e. they can choose how many shares in the IPSX company to sell.

In contrast to open-ended property funds, the sale of shares of an IPSX company is not a redemption by the investment entity and so the investment entity will not have to sell any assets in order to fund the sale.

The potential disadvantages of an IPSX listing

The initial cost

Admission to IPSX Prime requires the production of a prospectus, which must be approved by the FCA. That can be a relatively time-consuming and expensive process. Although experienced practitioners like at Fladgate can help smooth out the process, potential joiners of IPSX will need to be aware of this.

The requirement for the underlying property asset should be of institutional grade (i.e. each property will generally have a market value in excess of £50 million) should mean that the costs of the IPO are not disproportionate to the market capitalisation of the IPSX company.

Loss of control

A company which has floated on IPSX is likely to have a number of different shareholders (even if the free float is only 25%). The owners of properties will therefore be accountable to those shareholders, which may require a change of mindset from property owners of privately owned property companies and groups.

The requirement to make market disclosures

It is fundamental to the operation of any stock exchange that there be a “level playing field” i.e. that all investors in a company on that exchange have access to the same information so that one group of investors does not have an advantage over another group of investors. There is therefore a requirement on IPSX companies (like on all other stock exchanges) to make an announcement as soon as possible any change in: its sphere of activity; its financial position; the performance of its business; or its expectation of its performance; which, if made public, would be likely to have a significant effect on the price of its shares.

Price sensitive information includes but is not limited to information which is of a kind which a reasonable investor would be likely to use as part of the basis of his or her investment decisions.

Our conclusions

Shares in Mailbox were initially due to be admitted to trading on IPSX on 21 October 2020. However, on 13 October 2020 Mailbox announced a two week extension of the timetable for its proposed IPO. Mailbox said that this was because there had been significant interest from retail investors in the IPO and so Mailbox extended the timetable in order to deal with this interest, which aligns with the desire of the Mailbox board to maximise retail investment.

It has taken quite some time between IPSX being approved as a recognised investment exchange and for Mailbox to become the first company carrying out its IPO on IPSX. It has now been just over a month since the IPO of Mailbox and shares are trading at a very slight premium to the float price. Mailbox was originally planning to list IPSX Prime and to raise £62.5 million. We are not aware of why Mailbox chose to list on IPSX Wholesale or the reasons for the delay (of over six months) in admission or the reduced fundraising. However, it is reasonable to assume that the appetite of retail investors for shares in Mailbox was not as high as had originally been hoped for or anticipated. Despite these apparent difficulties and the flat performance of Mailbox shares since the IPO we do view the Mailbox IPO as “proof of concept” and are cautiously optimistic that further companies will IPO on IPSX. It will be interesting to see how many more companies float on either of the IPSX markets and when they do so. In particular, it seems to us that a significant milestone in the progress of IPSX will be when a company floats on IPSX Prime and the performance of the shares in the first IPSX Prime company.

In our view, that (because of its focus on single real estate assets and multiple assets with commonality) IPSX should attract investors (both institutional and, when a company is listed on IPSX Prime, on retail) who might not otherwise invest in property companies on other stock exchanges. For the right company, IPSX might therefore provide access to capital that other exchanges cannot provide.

Fladgate’s experience

Fladgate is recognised for its extensive expertise in both the capital market and real estate sectors. We have acted for companies on the Official List, AIM and Aquis. We have advised on both the capital markets aspects of REITs and the day to day property and other operational issues of REITs. Our clients comment on both our experience and the practical way in which we apply our experience to help our clients to achieve their commercial objectives.

If you have any comments about IPSX and its relevance to you, please contact Nigel Gordon, Matt Williams or your usual contact at Fladgate.

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