A new regulated stock exchange, the International Property Securities Exchange ("IPSX") has launched in January 2019 having received Financial Conduct Authority (FCA) approval and will become the first and only stock market dedicated to commercial real estate ("CRE") assets.
The IPSX is a "Recognised Investment Exchange" under UK law. This means that admission of, and trading in, financial instruments on the IPSX will be conducted in accordance with the FCA's sourcebook for Recognised Investment Exchanges.
The ISPX, which is expecting to see the first issuers undertake initial public offerings in the second quarter of this year, will operate two markets: IPSX Prime (which is currently live) being the core market on which CRE owners can undertake initial public offerings of companies owning a single CRE asset or, if approved, a multiple asset; and IPSX Wholesale (which is still under development) which will focus specifically on closely-held CRE assets (e.g. joint venture held assets) seeking onshore real estate investment trust (REIT) status. The IPSX have made it clear that it is not a market for property development companies and an issuer will only be admitted if property development forms an ancillary part of its business.
It is understood that most issuers will be classified as REITs (subject to satisfying the REIT requirements) and will therefore benefit from the REIT regime and favourable tax treatment.
So what is the rationale for a new stock market dedicated entirely to real estate? Real estate is still deemed an "alternative" asset class despite its scale, performance and global appeal. The CRE market has been a slow industry to innovate (albeit real estate tech is starting to be embraced) and has often been seen as restrictive to smaller investors (particularly retail investors), due, in part, to the industry structure and its relatively illiquid nature. Commercial real estate is still dominated, in the private market, by large, specialist investors buying up whole, or significant interests in, buildings either individually or through joint venture vehicles and, in the public market, by investors acquiring an indirect holding in an investment trust or REIT (which usually invests in a particular class of property) or in a large listed property company such as British Land (which would have a broad ranging business model) or by acquiring units in an open-ended unit trust or a property authorised investment fund (PAIF). In contrast, IPSX investors will be able to buy shares directly in companies holding single commercial real estate assets.
The intention of the IPSX is to widen the CRE market by giving a broad range of investors (from the major institutions down to the high net-worth individuals and retail investors) access to real estate investment in assets that would otherwise not be available to them. The key drivers are to create more diversification (e.g. geography, type of asset, tenant) in the asset class and more liquidity which will come from the market trading of the shares on the IPSX rather than through buying and selling the assets directly. The aim is to build a market based on volume (which will help with trading and liquidity) underpinned by good quality stabilised assets which will provide strong yields but also allows investors to buy and sell their shareholdings in those assets with relative ease and low cost.
Admission to the IPSX may also benefit asset owners as it provides an alternative to raising capital through a partial or total sale on the public capital markets where the owner-occupier can have access to a wider investor pool but has the ability to retain the asset management and/or other elements of control over the asset.
So how does an issuer list on the IPSX? IPSX Prime is a Markets in Financial Instruments Directive (MiFID) regulated market. This means that a prospective issuer must satisfy the relevant requirements of the IPSX Rules for Issuers which set out the procedures, rules and obligations for applicants seeking admission to IPSX and the responsibilities and continuing obligations of issuers. Under the IPSX Rules for Issuers the following admission criteria will apply:
- The Issuer must be a "Single Asset Issuer" or, by exception only, a "Multiple Asset Issuer". A Single Asset Issuer is defined as an issuer owning the whole or entirety of an institutional grade real estate asset, having a commercial purpose, with a market value in excess of £50 million, and which occupies a single geographic area or comprises a single building or group of co-located buildings (e.g. a retail park). By contrast, a Multiple Asset Issuer is identified as an issuer that does not meet the definition of Single Asset Issuer but who wholly owns commercial real estate assets, with a market value in excess of £50 million, which show a significant degree of commonality (e.g. type/sector, tenant, geographic location, master lease). This will be determined on a case by case basis but we understand this could include, for example, a group of hotels or supermarkets.
- The Issuer must be duly incorporated and conform with the laws and regulations of its place of incorporation.
- An application for admission of any class of financial instruments must relate to all financial instruments of that class, issued or proposed to be issued. In addition the financial instruments to which the application for admission relates must (i) benefit from pre-emption rights on an issue of new shares for cash, (ii) be transferable and freely negotiable and (iii) be eligible for electronic settlement in the central security depositary.
- The issuer must have published a prospectus (unless a relevant exemption applies) which must include the information required by the Prospectus Directive and the IPSX Rules for Issuers (Schedule One) and must be approved by the FCA.
- The issuer must appoint and retain:
- An IPSX approved valuer (and must include a valuation report in any prospectus).
- An IPSX Lead Adviser with responsibility for assessing whether or not an applicant satisfies all the requirements for admission to IPSX.
- At least one market maker to register in the applicant's financial instruments upon admission to trading.
- The issuer must ensure that at least 25 per cent. of the shares to be admitted to IPSX must be in public hands (a "minimum free float").
- The issuer must specify the corporate governance arrangements which it has decided to apply and comply with their chosen arrangements.
- If the issuer intends to deploy leverage it must have a maximum loan to value ratio of 40 per cent. at the expected date of Admission.
- All related parties and applicable employees at the date of Admission must agree to a restricted lock-in period of at least one year from the date of Admission.
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