Dedicated stock exchange will ‘revolutionise’ commercial real estate investment | Hardman & Co.
International Property Securities Exchange (IPSX), the first stock exchange dedicated to companies owning and managing commercial real estate (CRE), is set to revolutionise the way CRE is valued, securitised and owned – according to in-depth research by Hardman & Co.
IPSX gained regulatory approval from the Financial Conduct Authority to operate as a ‘Recognised Investment Exchange’ in January 2019 and is set to formally launch later this year. A ground-breaking platform, IPSX provides a regulated market for trading shares in management companies which own single buildings or homogeneous discrete portfolios of real estate with commonality – through Single Asset Real-estate Companies (SARCs).
Hardman & Co analyst Mike Foster argues IPSX will bring numerous improvements to commercial property markets. By focusing on companies holding single assets or multiple assets with commonality, SARCs will have lower operating costs than Real Estate Investment Trusts (REITs). Meanwhile, the SARC itself will own and manage the asset, enabling investors to invest in property quicker than buying the underlying asset directly, as well as at a lower transaction cost. Commonality covers single estates with homogeneous planning use, such as an office park, or a single type of asset – for example hotels – across a broad geography.
Hardman & Co research expects SARCs to attract investors with diverse strategies and time horizons, which means IPSX liquidity is likely to be high. Hardman anticipates a typical IPSX SARC of £300m may trade £230,000 per day. Moreover, as these investors will likely run pools of assets dedicated to property, and not comparing against other sectors, this should minimise volatility and lower correlations.
According to the research, the fractional ownership of ‘quasi-direct property’ should attract a wide range of investors – retail investors able to access a new asset class, family offices with a preference for direct property, and institutional investors seeking additional liquidity. It will also benefit landlords and drive cost efficiencies for asset management companies. Investment companies specialising in real estate can also reduce cash drag when raising new equity by temporarily investing in SARCs, while they wait for appropriate direct investments to complete.
The IPSX trading platform will give capital markets real-time share prices for SARCs, which will increase transparency around company valuations. The ability to use SARCs should avoid the marked divergence between share price and net asset value (NAV) that REITs can otherwise experience. This can occur due to lack of transparency around the value of the active management, as well as the fact REITs often conduct operational activities, such as real estate development. However, single asset companies, where valuations are updated in real time, should see minimal discrepancies between share price and NAV.
Mike Foster, analyst at Hardman & Co, says: “IPSX truly reimagines real estate investing. By increasing transparency and enabling issuers to focus on cost-efficiency, it will appeal to investors and issuers alike. The number of narrowly focused specialist REITs has grown considerably in recent years and IPSX caters to this demand for tightly defined asset-class investing.”
IPSX head of capital markets Roger Clarke adds: “IPSX will usher in the democratisation of real assets. As a regulated exchange, investors will have the comfort of duly mandated processes for publication of information. This transparency around valuation and risk will provide more focused data than is the case for the wide range of assets in traditional REITs.
“IPSX encourages the broadest possible investor universe to participate in the real estate sector. IPSX companies are structured to provide a more direct connection between owners and assets, while providing liquidity and protections on a regulated exchange.”
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Mike Foster, Analyst
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