A new development
It is now possible to list a single commercial building on a new London stock market called IPSX (the International Property Stock Exchange). However, no one had actually done this until one of the co-owners of IPSX itself (M7 Real Estate) announced a few days ago its intention to list one of its own buildings: the 698,000sq ft former Royal Mail sorting office in Birmingham called the Mailbox. The shares are now being marketed and if all goes well the float will be effective on 21 October 2020.
The mainly office mixed-use property is valued at £179m (down from £200m in December 2019 as a result of the impact of COVID-19) and the anticipated market value of the company after debt is taken into account is around £116m, which is about equal to the NAV.
The IPSX requirement is that the commercial property, which must occupy a single geographic location or postal address, must be of institutional grade (minimum £50m market value) and have a maximum 40% LTV. IPSX states that it is not a market for property development companies, although property development can be an ancillary part of the business. In exceptional cases the holding of multiple properties is permitted if they have a significant degree of commonality, whether by type, sector, tenant or master lease. The process does involve a full listing: a prospectus will need to be prepared, at least 25% of the shares needs to be in 'public hands', a red book valuation is required every six months, a set of audited accounts prepared and a corporate governance code will need to be adopted.
What are the benefits of listing on IPSX?
With a minimum of 25% needing to be put into 'public hands' listing on IPSX is, in effect, a part disposal, and the original property owner will end up ceding a lot of control to the board of the company who will need to operate largely independently of a dominant shareholder. As with funds and REITs there will also be concerns as to whether the share price will properly reflect the market value of the property (the discount to NAV). However, for some listing on IPSX is possibly a less draconian option to realise funds than a sale and leaseback. Although the Mailbox structure is a REIT (and so must distribute 90 per cent. of its profits from its property rental business) that is not a requirement to list on IPSX. As ever, the relevant structure would be predominantly tax-led.
Given that M7 will be the asset manager, will hold 46% of the listed company, and is also a shareholder in IPSX itself, this first listing is probably not full proof of concept. Other shareholders in IPSX include British Land, Moorfield Group and Tritax.
54% of the shares are being offered and this will raise £62.5m, or £59.4 after float expenses of £3.1m. According to the prospectus, of the net amount raised £50m will reduce debt to get LTV to under 40%, £2m to repay shareholder debt, £5.2m to convert some space from retail to office, and the £2.2m balance for working capital. Traditionally, raising public money predominantly to pay down debt has not been an attractive proposition to investors, and so this proposed use of proceeds is noteworthy of itself. It will be very interesting to see how the company performs.