The recent gating of the M&G Property Portfolio fund and the sharp discounts attached to listed real estate companies highlight the downturn in sentiment towards investing in UK property over the past year.
The first dedicated real estate stock exchange, which is gearing up to launch its first IPOs in the first quarter this year, is hoping to woo investors with the promise of a lower-cost and more transparent method of owning UK commercial property assets.
The International Property Securities Exchange (IPSX) will allow investors to trade shares in single-asset-owning real estate companies, ranging from “iconic office towers in London to retail food stores in the provinces”, according to chief executive David Delaney. Discussions are also under way with a number of sports stadiums in relation to possible listings on IPSX. In addition, shares in multi-asset real estate companies will be traded where there is commonality in the assets, such as estate with a relatively homogenous planning permission use category.
The sweet spot for companies listed on the exchange would be those with a market value of around £250m, said Mr Delaney. Buildings need to be fully developed and let to be eligible and have a maximum loan-to-value ratio of 40 per cent. Owners would need to float at least 25 per cent of the value of the company to ensure sufficient liquidity for investors.
Each security will disclose information on tenants by risk profile and a six-monthly valuation will be provided with asset management plans.
IPSX, which was issued with a recognition order by the Financial Conduct Authority at the start of last year, also hopes to gain regulatory approval for a wholesale exchange for higher-risk properties that would be available to institutional investors. The minimum free-float of assets would be below 25 per cent and the loan-to-value limit set at 80 per cent.
In total, there are 28 companies in the pipeline across its prime and wholesale exchanges, said Mr Delaney.
The exchange is designed to give investors direct exposure to single, institutional-grade assets that typically only major asset managers, sovereign wealth funds and private equity groups could afford. The costs associated with trading the shares will be similar to trading stocks on the London Stock Exchange, via a broker. The exchange would also give owner-occupiers the chance to raise capital by selling part of a building.
The costs associated with owning a share in one asset should also be lower than those in a real estate investment trust (Reit), where investors are paying for investment management teams running larger, multi-property portfolios that typically incur higher costs. “There is much lower leakage from gross rental income down to dividends,” said Mr Delaney.
Analysts at Hardman & Co estimate that IPSX single-asset-owning companies might be able to achieve average EPRA cost ratios – net overheads to gross rental income – of as low as 10 per cent, below the cost of many large Reits. By way of comparison, British Land (BLND) recorded a cost ratio of 16.9 per cent in 2018.
Rather than “making a bet on a management team”, where investors have no control over what assets enter the Reit, said Mr Delaney, there is greater transparency around investing in a single asset.
Daily trading means the exchange would also be without the liquidity challenges of open-ended funds, he added, which has forced some investment managers to hold as much as 20 per cent of their portfolio as cash.
