Q+A: Richard Croft & React News

Taken from an article published on React News on the 21st October 2022, here: Q+A: M7’s Croft on Bridgewater Place IPO, the future of IPSX and the power of the regions - React News

The foundation of specialist real estate bourse IPSX is one of the sector’s most ambitious endeavours of the past decade. Convincing the top players behind the world’s largest investment class to recalibrate their approach to the public markets, by floating single assets or highly focused collections, on an embryonic exchange requires a change in mindset.

Accordingly, progress has been slower than first hoped, with the initial outline of the project having been laid out as long as seven years ago. But with its third vehicle on the cusp of listing it is steadily gaining momentum.

IPSX backer M7 Real Estate is in the process of raising £35m for the IPO of Bridgewater Place, Leeds’ tallest building, through the vehicle BWP REIT. It is due to be the third such listing after that of the Mailbox in Birmingham and a collection of urban retail warehouses known as E-Warehouse REIT.

React News caught up with M7 chairman and IPSX backer Richard Croft to discuss progress with the float, his plan to revitalise Bridgewater Place and why REIT bosses should be looking to the exchange as a solution to their woes.  

What was the initial attraction of Bridgewater Place and why do you think it’s a good fit for IPSX?

We started looking at it because, like with the Mailbox, we believe that regional offices are going to outperform over the next five years, regardless of the pandemic.

We think the long distance/mass transit commute is the thing that is most at risk, so we think centrally located regional offices are going to outperform.

Here we’re coming off a rental base of around £27/sq ft. We see growth from that, regardless of the economy.

“There is no grade A space really in Leeds available at all at the moment. And because of the cost of construction, there is a very, very limited pipeline”

We can create a wonderful building through refurbishment and repositioning, which because of embedded carbon is a better approach than building anew. Because of the cost of construction now getting so high, the reality is nobody can afford to build new anyway, so the best buildings will be the regeneration of prime buildings like this that have got a bit tired. So we think it’s an ideal asset for the needs of modern office occupiers.

You were first in talks to buy the building over two years ago. Why has it taken so long?

In part because there is a cladding issue and also because over the past two years the market has been gently, and then rather aggressively, trading downwards.

We started off at £85m and we are now buying at £61.8m. It’s been a long journey because we’ve had to address issues as we go through.

One of the things that is so exciting about this deal is that we are raising enough money and we’re buying it well enough, at a price where we can address the cladding problem on the residential aspect of the building [which is largely not being bought by the company as most of the units have already been sold].

Bridgewater Place PLC will just be managing the repair of the residential building. Us footing that bill is obviously beneficial for those leaseholders and IPSX is being used to find a solution to one of the greatest real estate problems that the country currently has.

What is the asset management strategy?

We’ve got our pathway to net zero by 2030 and we will end up with a prime, very prestigious building in three years’ time. That gives us the opportunity to move the rents forward rather considerably. We bought it for what would be the equivalent of about a 9% cap rate as we look at it today. We’re going to be spending a lot of money on it, but what we’re going to be left with is a building that has got substantial investment value.

Tenants will be able to remain in place as we do the refurbishment on a rolling basis.

The building has the most extraordinary atrium but the current owners have not been able to do anything with it. So there’s a plan for the atrium. I’m not going to go in too much detail, but there will be new amenities that will make it a much more vibrant place. We will learn some lessons from the Mailbox in terms of creating a work/play element to the building, not just a straightforward, boring office block.

Assuming that we get admitted for listing in the next couple of weeks, I think our plan assumes a 30 month project. I’d hope a little bit quicker than that, but somewhere between two years and 30 months.

What is the fundraising environment like at present?

We’re doing a dual listing. We’re listing the equity on IPSX and we’re listing a loan note on the International Stock Exchange. The loan note is fully raised and that’s already been drawn down so we have sufficient money to buy the building because [existing lender] Barclays Bank is staying in to provide the senior debt.

“As the exchange grows and more and more assets come on there, and more and more investors are attracted to it, liquidity grows by definition”

We’re raising £35m of equity, which will cover the cladding and for the entire refurbishment of the building, which will totally regenerate it. We’re feeling very positive about the momentum we have with a number of cornerstone investors on board.

How do you see the dynamics of the Leeds market in particular?

Over the last three or four years we’ve seen a lot of big companies like Goldman Sachs and PwC and HSBC take major offices outside of London.

The tenants of this building – EY, Eversheds and DWF – these are proper tenants and I think more and more we’re seeing that regional centres like Leeds are going to benefit from the fact they are, from a cost of living and a cost basis, considerably cheaper than London.

Particularly in an economy like this, that cost element is going to play. Because of technology we don’t all have to be in the same place all at the same time. I definitely believe that people want to collaborate but they don’t all have to collaborate in London.

Do you hope that those existing tenants will choose to stay beyond the refurbishment?

We would like them to stay but it’s up to them of course. I like to think that when they understand quite what we’re creating that they will plan to stay. But we’re not relying on it and we don’t need them to.

There is no grade A space really in Leeds available at all at the moment. And because of the cost of construction, there is a very, very limited pipeline. I think we will be creating the best building in Leeds by the time we’re finished with it. And I think if you’re a tenant who wants a pathway to net zero, which we will have, a fully refurbished, fully compliant building, then your choices are going to be somewhat limited.

Do IPSX vehicles provide sufficient liquidity to investors?

With the Mailbox every trade that has investors have wanted to, has happened. There is electronic trading, albeit a fairly limited amount, but we accept that. But the exchange will become more liquid the more assets that are listed on there. We’ve traded around £5m of shares in the Mailbox over the last year, which is somewhere in the region of 6% of the capital value of the shares. But it’s been more liquid in E-Warehouse REIT.

Is it easier than if you wanted to come out of a fund? Absolutely. Is it fully liquid? No, but we’ve not claimed it is.

But as the exchange grows and more and more assets come on there, and more and more investors are attracted to it, liquidity grows by definition.

But also let’s look at the relative performance of the Mailbox – it’s up to around 105p or 106p, which is considerably better than any listed stock on the LSE. It’s not being buffeted by beta movement, it’s being buffeted by alpha movement. Other than the BBC leaving in five years’ time, there hasn’t been any particular news, so, it’s been okay.

And the share price of E-Warehouse has gone up from £1 to around 111p. That’s caught the e-Warehouse boom but it’s been relatively solid.

So, I’m feeling pretty pleased with the performance of the two assets that have been on there.

How do you feel about where IPSX is in its journey and its IPO pipeline?

There is a reasonable pipeline of activity coming after Bridgewater Place.

When you’re trying to create something new, which we are, there will always be reticence. This journey has been a long time coming. But we are committed to it and we are now winning.

The argument for why real estate should have single asset REITs and homogenised REITs is that it allows you direct access into real estate, which the traditional REITs generally don’t. You get exposed to management companies and a portfolio of assets you don’t control. With IPSX, you the investor get to decide. I personally think that’s a very positive development for real estate.

I mean there’s an argument for many major REITs trading at wide discounts to list assets on IPSX, prove value and then eventually move their entire portfolio to IPSX and then just list the management company. Because that would create far greater value.

Real estate is the biggest business in the world and it doesn’t have its own designated exchange. That doesn’t make any sense at all. And the frictional cost of real estate trading is just going to go up.

Stamp duty in the UK is 5.2%. The whole round trip is probably 10%. That doesn’t make any sense.

More and more people are getting used to the idea of the exchange, and that the reasons for having it are obvious. The fact is we’ve got two things away. We’re about to get a third thing away. There are five or six, seven, eight things in the pipe. The reality is it’s slowly gaining traction.

For all those people who’ve been naysayers, they can point to it taking a long time. But real estate has basically traded the same way 500 years since 1862, through the Land Registry. It takes a bit of time to do things like this.