National Real Estate Investor | New U.K. Exchange Tests Waters on Public Market for Single-asset Real Estate
The British International Property Securities Exchange (IPSX) is the world first regulated stock exchange dedicated to the initial public offering and secondary market trading of companies owning single institutional grade real estate assets. Its first IPO is set to go live by year's end, which will give the IPSX a real world test in its attempt to offer a new way to invest in the real estate market. If the model catches on, exchange founders have even bigger plans to take their the idea global with their sights set on Europe, Asia and North America for other exchanges down the line.
IPSX will operate two markets. Its IPSX Prime is a regulated market that is designed for core and core-plus real estate assets that are stable and income-producing. Shares on this market can be bought by any investor, including a retail investor putting shares into a retirement savings plan. IPSX Prime is preparing for its first IPO to hit the market before year-end with Mailbox, an office-led mixed-use property in Birmingham. Owners plan to raise up to £62.5 million via the offering.
IPSX Wholesale is a market for value-add, opportunistic transactions that is only open to professional, institutional investors. It is an exchange regulated market, meaning that British regulators leave it to IPSX to manage. Unlike Prime, IPSX Wholesale is capable of accepting a variety of different corporate structures within a flexible regulatory framework, including JV REITs. There is no prescribed minimum free float, which allows structures to list with very small minority holdings. For example, an owner could use the exchange to list 20, 40 or 60 percent of an asset and still maintain the remaining ownership stake. Lastly, it allows for an “emission document” versus a prospectus, which creates a much quicker listing process.
NREI recently spoke with Roger Clarke, managing director and head of capital markets at IPSX to hear more about how the exchange could be used by real estate owners and investors, as well as next steps for growth.
This Q&A was edited for length, style and clarity.
NREI: What are the big advantages for owners to list properties on IPSX?
Roger Clarke: There are three key advantages to an owner of real estate looking at an exchange exit solution. The first one is the flexibility it brings. Normally if you’re an owner who is thinking of monetizing an asset, the options are quite limited. You can sell it, refinance it with new debt, or possibly look to structure some sort of JV arrangement. The flexibility of using the exchange means that you can sell anything from 25 percent to 100 percent of the asset on the Prime market. On the Wholesale market, you can sell anything from 1 percent to 100 percent of the asset. That interest that you retain gives you economic exposure to the asset. You can sell down a few shares regularly or sell in tranches, or even add back to your holding by buying shares back.
Second, it does give you access to a much broader pool of capital. There are significant tranches of capital that do not buy real estate. Just looking in the U.K., the institutional equity market is about £1 trillion depending what figures you are looking at. There is double that, over £2 trillion, in private wealth and private banks, family offices and retail execution only platforms. Some of that money will buy real estate. But a lot of it doesn’t buy listed real estate, because it doesn’t like volatility in markets. Or a lot of that capital doesn’t buy real estate because investors don’t have a sufficiently big enough pool of capital to buy a building. For example, 60 percent of all transactions that occur in the direct property market in the U.K. are for individual buildings valued at £50 million pounds or more. It’s a big ticket asset class. Even if you have £50 million to allocate to real estate, you don’t put it all in one building.
Third, bringing a structured approach to pricing would take you away from the third party appraised value. Other things being equal, having brought more capital to the market along with a more flexible pricing structure, you should be able to get better execution than going through the direct market.
NREI: What about on the investors' side?
Roger Clarke: It’s the other side of the same coin. If those advantages I just set out for owners lead to issuers bringing new assets to capital markets that haven’t been there in the past, then that new product source of investible buildings in itself is an advantage for the investor. Asset-backed yield plays are interesting for everyone. So, the fact that we can bring this huge asset class to investors and A) fractionalize it, and B) wrap it up in the regulatory protections of the stock exchange–those are the main advantages for investors.
NREI: Selling fractional ownership as shares or securities sounds a little like Delaware Statutory Trusts (DSTs), although DSTs are not sold on a public exchange. Are there some similarities?
Roger Clarke: The public exchange is the important part. In the U.K. over the last 50 years we have had various structures that have fractionalized real estate, but none of them have really been successful. From American colleagues, I have heard about tenant-in-common structures. All of these have lacked one thing that we have, which is the secondary market. Because our infrastructure is a traditional stock exchange, it means there will be liquidity providers that will be part of our exchange, and there will be market makers who will make two-way prices. So, once you have bought shares in an IPSX security the key difference between a DST, or other structures we have seen such as tokenization, is that you own your share of the building. Your liquidity options mean you don’t have to wait for the “natural” buyer on the other side. You can sell today.
NREI: Mailbox REIT is set to become the first company to list on IPSX. Do you have any other announcements or anything else in the pipeline?
Roger Clarke: We have one other that has been publicly announced, which is an office building in Leeds. Bridgewater Place is a multi-let office. The owners have said in the press that they plan to put it on IPSX early next year. That is the only one that is in the public domain. We do have lots of things coming in the next 12 to 24 months. A big issue for us is that many people in the industry are really excited about the idea of what we’re doing, but it is a conservative industry that we work in. A lot of people have said to me that they would love to see the exchange working and they would definitely use it, but I’m not going to go first.
So, getting these first couple done will take away some of the novelty element, and we do expect to see a very, very busy 2021. That is great, because hopefully 2021 is going to look COVID-free and we’re going to have a more stable political backdrop. You have obviously had your election recently in the U.S., but we spent most of last year in the U.K. hamstrung by politics with our parliament that basically ground to a halt. So, we are looking forward to next year where the market is not going to be talking about politics and pandemics.
NREI: Do you have a minimum asset size on properties listing on the exchange?
Roger Clarke: We think that minimum is £50 million, but the assets in our pipeline are bigger than that. The smallest asset in the pipeline right now is the one in Leeds, which is valued at just under £90 million.
NREI: So, 12 to 24 months down the road do you have any targets or goals on how many companies you might have listed?
Roger Clarke: As I look at my pipeline, I would see having five listings on the exchange by the end of June. The ones that I have in mind cover a pretty broad range of real estate assets. So, if we can prove the concept across these five quite different areas , if each of those leads to one or two deals in the second half of next year, we could easily see 10 to 12 deals by the end of 2021. The important focus for me in the short-term is getting those first five deals done.
NREI: Do you think this same model could work in the U.S.?
Roger Clarke: Absolutely, I think it could work globally. Real estate is the biggest asset class in the world. It is tiny as a sector of the listed stock market, but as an asset class it is vast. It is something that absolutely everyone understands. Everyone uses real estate in some form or other. As global populations age, the need for wealth protection and a source of income grows, and I think the savings and asset management industry has some real structural problems to address. These themes are all global. IPSX is the International Property Securities Exchange. We started in London and it is a British company. So, we will start with a lot of assets listed in London and the U.K., but it is only the start. It is absolutely in our plans to expand into Europe first and then shortly thereafter in the medium terms we have plans for an exchange in Asia and an exchange in North America. So, look out. We are coming.
NREI: So, you are looking at adding an exchange in North America?
Roger Clarke: Yes, we have begun to have preliminary conversations with potential partners in the U.S. It is definitely on our radar. To your question, I see absolutely no reason why it wouldn’t work in the U.S.