April 17, 2020
This article was written by Dominic
Gover, Editor of Property EU.
A hospital and a football stadium in the UK are among the candidates of assets to float on a new stock exchange for individual buildings.
The International Property Securities Exchange (IPSX) is the first exchange solely for commercial real estate which is fully regulated – by the UK’s Financial Conduct Authority. Major names in European real estate are backing the IPSX, with British Land, M7 and Henley Investments the three biggest shareholders.
Depending upon the outcome of ongoing discussions, there could be around 28 UK buildings in which investors will be able to own shares, when the exchange opens for trading. Also in the running to float on the IPSX is a £2 bn office asset in central London owned by a sovereign wealth fund.
Behind some of buildings currently under discussion are interesting stories. The NHS trust which owns the hospital wants to raise around £100m to build a new children’s cancer unit. The owner has secured half the required capital from the UK government and is seeking to raise the rest in a way which demonstrates best value for the taxpayer. Floating the asset on an exchange is seen as a way of achieving an optimal execution clearing price.
The idea of trading shares in buildings is not new. But the team behind IPSX say what makes now the right time to launch the world’s first regulated stock exchange is the super low interest rate environment and a concomitant glut of capital seeking a safe haven offering above inflation returns, as well as regulators’ preference for exchanges over other types of market, following the global financial crisis of 2008.
Two exchanges make up the IPSX; a wholesale market for professional and institutional investors and a prime market open to retail investors – the ‘man in the street’ – from £5,000 (€5,558). It is the same experience as trading on the NASDAQ or the London stock exchange.
One question is about asset valuation. How can investors be confident they are getting a true price?
‘Valuation is one reason we think IPSX is very timely,’ he says. ‘A lot of valuations are backward looking, though of course they’re not going to dismissed out of hand. But a key part of our transparency in that at IPO time you have a RICS evaluation done by some of the top valuers in the world, which has to be updated on an ongoing basis.
‘Also, you have a daily pricing given by the market. Therefore, price is based more on forward looking cashflow, than on backward-looking redbrick valuations.’
Five companies are acting as valuers for the exchange; Cushman and Wakefield, Lang LaSalle; Knight Frank; CBRE and Avison Young. According to David Delaney, CEO of IPSX, each building comes with an evaluation by RICS and this is updated every six months.
What’s in it for potential investors? There is the chance to own a stake in a building which the owner does not want to sell. For owners, there is the lure of access to capital from trading a portion of the asset and the chance to retain lucrative asset management contracts, and access to a large pool of investors.
But what about the risk that owners of buildings will use IPSX to wash their hands of bad assets by diluting their ownership? Delaney admits this question comes up regularly.
‘This exchange is in no way going to be a dumping ground for assets performing poorly,’ he says. ‘Absolutely not. I say that with conviction because we have a regulatory team who will approve all the assets for trading according to very strict rules. We also have very clear rules on loan-to-value.
‘With a building’s prospectus and ongoing valuations, there is great transparency about how the asset will perform. Actually, there is a lot more transparency for investors to have a greater understanding than if the asset was in one of the big funds.’
Meanwhile, market forces at play in the stock exchange should guard against shares trading at above net asset value (NAV), says the company.
We don’t think anyone is going to be able to do an IPO at above NAV. You would expect assets to trade at their value at IPO and how it trades after that depends on factors like supply and demand,’ Delaney says.
‘The idea an asset owner could hoodwink investors at IPO by selling an asset at significantly above what it’s worth, really can’t happen because you have an up-to-date valuation.
‘Where investors can get hoodwinked is with the heterogenous property companies, when you really don’t know what they have at any given time. You really have no idea of the asset mix is and how it's changing because it’s completely opaque. People can take advantage through that route, but our route is super transparent.’
IPSX Wholesale is a market exclusively for institutional and professional investors.