This article discusses the upcoming International Property Stock Exchange (IPSX) and the subsequent opportunities that it will provide for those in the real estate sector.
What is it?
We are getting ever closer to the launch date of the International Property Securities Exchange (IPSX), now expected in the last quarter of 2018. The IPSX is leading the way to become the first exchange where real estate securities will be traded as a predominant asset class and hence provide a bridge between commercial real estate owners and a large pool of investors.
What is the opportunity?
Real estate remains an ‘alternative’ asset class and one to which access has been typically restricted to large investors acquiring whole buildings or, at least, significant interests in buildings, which are commonly highly illiquid and follow bilateral and private negotiations for the acquisition. Smaller investors, particularly retail investors, had more limited opportunities - either by way of shares in investment trusts or companies investing in particular classes of property (eg big boxes), or shares in major listed property companies with very broad ranging businesses (British Land, Land Securities, for example) or units in open-ended property funds. IPSX will allow investors to buy shares in companies holding single commercial real estate assets and hence gain exposure to specific assets. On IPSX, liquidity comes from the market trading of the shares on IPSX rather than redemption (as is the case for open ended property funds), which resolves the conflict those funds have suffered where the illiquid nature of the underlying assets has made meeting redemption requests difficult.
For property owners and developers seeking investors for assets, an IPSX flotation provides an alternative sale process. Costs are likely to be in a similar quantum. Once an asset is floated, a proportion of the shares can be retained (provided the free float requirements are met) and disposed of subsequently at a negligible cost, which delivers flexibility for the developer or asset owner in a way that is typically not available in a bilateral process.
On the IPSX Prime market, issuers will be able to progress an Initial Public Offering of shares in companies owning, developing and managing single (or a small group of) commercial real estate assets. The second market segment, IPSX Wholesale, will initially focus on trading joint venture single asset REITS. The IPSX Prime will launch first while the IPSX wholesale is still under development. More details are expected to be published later this year. Here we focus on IPSX Prime.
How is it regulated?
Once the regulatory requirements are met and the full authorisations are obtained, the IPSX will be an FCA regulated exchange that falls under the category of ‘Recognised Investment Exchange’ and an ‘EU-Regulated Market’. As an EU-Regulated Market, it will need to ensure the protection of investors and establish transparent and non-discretionary rules and procedures.
Who can be admitted?
IPSX is aimed at Single Asset Issuers. However, in certain cases, it can include Multiple Asset Issuers.
A Single Asset Issuer is identified as an issuer who wholly owns a commercial real estate asset (with market value above £25m) that occupies a single geographic area. The real estate can comprise either a single building or group of buildings.
A Multiple Asset Issuer is broadly defined as an issuer who does not meet the definition of single issuer who wholly owns commercial real estate assets (with aggregate market value above £25m) and, most importantly, who can display a degree of commonality (ie by type/sector, tenant or master lease).
A prospective issuer wishing to be admitted to the IPSX must:
- be duly incorporated and operating in accordance with all applicable laws and regulations
- comply with the corporate governance arrangements established by the IPSX, or otherwise report and explain any non-compliance
- admit all, and not only some, of the financial instruments in the particular class to be admitted and ensure that all financial instruments:
- comply with applicable laws and regulations
- benefit from pre-emption rights on issue of new shares
- are transferable and freely negotiable, and
- are eligible for electrotonic settlement in the central security depositary.
- ensure that at least 25% of the shares to be admitted to IPSX must be ‘free float’
- publish a prospectus (this must comply with the Prospectus Directive (Directive 2003/71/EC) as well as the IPSX rules and include a Valuation Report prepared by an Approved Valuer)
- a Lead Adviser
- an Approved Valuer, and
- a Market Maker.
- pay any applicable fees.
We expect the majority (if not all) IPSX issuers will meet a “standard listing” standard, but it is possible for an issuer to elect to meet ‘premium listing’ standards issued by the FCA – but in practice we think the three-year historic track record requirements will be difficult for many IPSX issuers to meet.
An issuer must satisfy IPSX’s continuing obligations. These include:
- retaining an Approved Valuer (who is required to be changed after a maximum period of 5 years) and at least one Market Maker at all times. It must notify IPSX of any changes concerning them
- appointing a Lead Adviser in certain circumstances such as entering into material transactions (eg reverse takeover), issuing further financial instruments, being in severe financial difficulty, or in case admission to the IPSX is cancelled
- publishing annual and half-yearly valuation reports prepared by an IPSX Approved Valuer
- disclosing to IPSX the details of general meeting resolutions and notifying changes in relation to the issuer’s directors, accounting dates, address, legal name or any changes in its capital structure or issued share capital
- complying with IPSX rules in relation to transactions, reverse takeovers and related party transactions. A ‘class test’ regime applies (similar to that for AIM and UKLA listed companies). A detailed announcement is required of the terms of all transactions with a class test ratio of over 20 per cent. Reverse takeovers (class test ratios over 100%) and related party transactions where a class test ratio of over 10% applies both require shareholder consent following the dispatch of an explanatory circular to shareholders, and
- issuers of further shares will be limited by the relevant issuer’s authorities to allot shares and to allot shares on a non-pre-emptive basis which are expected to be sought in line with usual investor guidance and the Prospectus Directive.
In addition, an IPSX issuer will be subject to the Market Abuse Regulation and the Disclosure Rules and Transparency Guidelines.
Will IPSX companies qualify as REITS?
Yes, admitted companies are expected to qualify as REITS and benefit from the REIT regime and favourable tax treatment.
Will IPSX companies be regarded as Alternative Investment Funds (AIFs) for the purposes of the Alternative Investment Fund Managers Directive (AIFMD)?
Although each company will require detailed analysis, it is likely that IPSX companies will be AIFs under AIFMD. Limitations might be imposed for marketing outside the UK.
Can IPSX companies be marketed to retail?
Companies on IPSX will be treated as “excluded securities” for the purposes of the non-mainstream pooled investments (NMPI) regime, because they are REITS. Therefore, they will not be subject any promotion restrictions imposed by the FCA policy statement 13/3 (Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes) and can be freely marketed to the retail market.
Lead Advisers: eligibility and obligations
The Lead Adviser’s main responsibility is to ensure that prospective issuers meet the IPSX admission standards.
To be an authorised Lead Adviser, a corporate entity must:
- be authorised by the FCA or a member of a designated professional body
- have the required competencies to provide IPSX Lead Adviser services, and
- has appropriate systems and controls in place to carry out its role as an IPSX Lead Adviser in accordance with the IPSX rules.
IPSX will take into account several factors in assessing the lead adviser competencies, including any experience in any investment exchange recognised by the FCA and the knowledge of employees of the IPSX rules. In relation to the appropriate systems and controls, it must have systems and controls that resolve any conflicts of interest, manage market abuse and financial crimes risks, ensure effective provision of valuation services and be in compliance with all applicable IPSX rules. We expect that existing UKLA approved sponsors will be well placed to fill the requirements.
A Lead Adviser will be acting as the main point of contact between the relevant issuer and the IPSX. It must also:
- fully cooperate with IPSX and ensure the accuracy of any information provided to IPSX
- comply with the applicable IPSX rules
- continue to satisfy the eligibility requirements
- take reasonable steps in Identifying and managing conflicts of interests that could impact its provision of its services
- keep records of services provided and evidence of its compliance with the applicable IPSX rules for a minimum of six years
- disclose any remuneration received from the admission of issuers on IPSX, and
- pay annual fees.
Approved Valuers: eligibility and obligations
An Approved Valuer’s role is to provide its opinion of the value of the relevant interests of companies in accordance with the Royal Institution of Chartered Surveyors (RICS) Valuation - Professional Standards (Red Book Valuation). The Valuation Report is a key element of the Prospectus.
A corporate entity or partnership will be able to be admitted as an IPSX Approved Valuer if it can establish that it:
- has adequate number of employees who are members of the RICS Registered Valuer Scheme
- is competent to provide valuation services to Issuers, and
- has appropriate systems and controls in place to carry out its role as an IPSX Approved Valuer in accordance with the IPSX Rules and IPSX Rules for Issuers.
For an Approved Valuer to be regarded competent it must have 3 years’ experience in Red Book Valuation and must be a RICS Registered Valuer. It must also have appropriate systems and controls that resolve any conflicts of interest, manage market abuse and financial crimes risks, ensure effective provision of valuation services and be in compliance with all RICS’ rules and standards.
The continuing obligations of Approved Valuers include:
- satisfying the eligibly requirements
- complying with the applicable IPSX and RICS rules
- taking reasonable steps in Identifying and managing conflicts of interests that could impact its provision of valuation services
- keeping records of services provided and evidence of its compliance with the applicable IPSX rules for a minimum of six years
- disclosing the details of any remuneration received or to be received in relation to the provisions of valuation services, and
- paying annual fees.
Market Makers: eligibility and obligations
Each Market Maker is responsible of providing two-way prices for at least one security on each business day during mandatory quote periods (MQP) (periods that are specified as such by the IPSX through market notices). The permitted activities of a Market Maker also include:
- conducting and completing exchange trades in securities
- participating in order entries for securities auctions, and
- submitting trade reports.
To be admitted as a Market Maker on IPSX, an applicant must satisfy the following requirements:
- be a MiFID investment firm or a CRD credit institution authorised by the Prudential Regulation Authority (PRA) and/or FCA or any other competent authority in the EEA
- connect to the IPSX Trading Platform
- have adequate systems and controls and sufficient staff with adequate knowledge to ensure full compliance with the IPSX rules
- if incorporated outside the UK or is an individual who is resident outside the UK, appoint an agent for service of process in the UK, and
- if required by the IPSX, provide a written legal opinion from external legal advisers on the validity and enforceability of the IPSX rules against it.
Market Makers must ensure they satisfy the following obligations on continuing basis:
- submitting two-way prices for each security in conformity with the Minimum Exchange Size (as set out by the IPSX)
- complying with the IPSX rules and the requirements and market notices issued by the IPSX
- remain authorised by the PEA and/or FCA as applicable
- complying with any enquires initiated by the IPSX
- have in place adequate voice-recording systems and record all conversations in relation to its activities for at least six months from the date of the relevant conversation
- notifying IPSX of any changes that may impact in continuing obligation and for breach of any IPSX rules or the occurrence of any financial difficulty, and
- pay any required charges and fees as specified and notified by IPSX.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.