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Real Estate

Bell rings for London’s new property exchange

Anthony Gahan, chairman and founder of IPSX, spoke to GRI Hub about why he established London’s new property exchange.

3 MIN READ May 22, 2019

London’s new International Property Stock Exchange (IPSX) expects to host its first ever initial public offering (IPO) in the second half of 2019, having gained its operational licence from the Financial Conduct Authority (FCA) on 8 January 2019. IPSX is now London’s seventh recognised investment exchange, alongside others including the London Stock Exchange (LSE), Euronext and the London Metal Exchange (LME).

Anthony Gahan, chairman and founder of IPSX, explains the vision behind the new exchange – a vision which dates back over 25 years to earlier efforts at the securitisation of real estate. As a fintech-focused investment banker, he looked at the securitisation of Billingsgate, the blue glass offices on Lower Thames Street which used to house investment back Samuel Montagu. Similar, previous efforts to securitise real estate have included ‘pinks’ or PICs (property income certificates), and ‘spots’ or special purpose trusts.

“Essentially, these were products created by real estate people. They may have been very convenient to the real estate person, but finding a market on which to place them was impossible,” says Gahan, who decided that the proper way to securitise real estate would be to create a new stock exchange. Being a co-founder of his own, independent corporate finance advisory firm (Wyvern Partners) in 2002, gave Gahan the flexibility to put his ideas into practice.

Opening up the pyramid

Understanding exactly why it is that real estate remains an alternative asset class is important, says Gahan, explaining why a new stock exchange is so badly needed.
“Real estate is alternative,” thinks Gahan, “because there is no public market for it. If you imagine the investor world as a great big pyramid, and at the top of that pyramid there's a dot, a very small dot, then that is the universe that currently invests in real estate. I'm hugely simplifying, but the universe of buyers for £100m buildings are those who already own those sorts of buildings, and they swap them between themselves.”

Investors at the top, says Gahan, will have a cheque book that is big enough to buy a very large building and they will be happy to live with illiquidity, because they have the management skills to look after the asset in a professional way. However, the rest of the pyramid includes enormous institutions which, Gahan argues, are seriously under-invested in real estate. Taking the UK as an example, he points out that generalist funds have on average around 3% of assets under management in real estate, whereas the allocation that pension consultants would suggest is mid-teens.

“That’s a huge delta,” says Gahan. “And it’s because generalist funds cannot really invest directly in real estate. They want liquidity, transparency, things like that. At the moment, the only option in real estate is a public security – typically a REIT - but that REIT is another fund, so they become a fund of funds. What many are really wanting is to say ‘here's my thesis on real estate: I want a bit of that office block in London and a bit of that one in Madrid,  but only 2% of that one and 5% of that one.’ Then you have a portfolio which is specific to whatever you think is the right investment for your clients.”

Going further down the pyramid, continues Gahan, smaller institutions – say a £5bn pension fund – could not afford to buy a £300m building: “Unfortunately, it’s too much. What you start to see is a lot of exclusion from this asset class by virtue of the rules, by what's available, or by the size.”

“Everyone in the chain wants a lick of the spoon,” says Gahan, but by the time you get down to the retail investor, their exposure to institutional grade real estate is zero. “It's because the product isn't there, that they can buy. There's this whole investor world that has never had real estate. The owners of these assets want to connect with them, but there's never been a mechanism to do that.  And now there is.”

The IPSX mechanism
 
At present, if the owner of a large, commercial real estate asset wants to sell it, their only choice is to sell the asset to a buyer who will purchase 100-percent.  “You either own it or you don't own it,” says Gahan. What IPSX offers, he argues, is a way to change the product: “Because of what we've done, that building can now be owned by a single PLC, just as you would have on the LSE. That PLC’s only job is to drive the greatest cash and best value out of that asset for its shareholders. It's a company with a single commercial real estate asset.”

Gahan estimates that the UK commercial real estate market is worth approximately £900bn, of which about 56% is institutionally owned by specialist real estate investors. “We're interested in each one of those assets, because we are offering an alternative to somebody just selling 100%.”  As for the other half of the market, the owner-occupied half, Gahan argues that for companies which own their own head offices, or operating facilities or distribution hubs, IPSX offers an alternative to entering sale and leaseback deals in order to release cash.  “A pharmaceutical company, for example, could release cash by selling 49% of its real estate. It would still have influence because it would own 51% and it could then put that cash into drug discovery or whatever its core business is, getting a better return than the rent that it now has to pay - a smart thing to do.”

No limits

Gahan sees no limit to the number of institutional grade, real estate assets that could be listed on IPSX, from sports stadia like Wembley and Twickenham to the Houses of Parliament: “I have thought about it, obviously,” he confesses.

IPSX will be opening more exchanges in continental Europe, the US and in Asia. There are also plans to do ‘something around data’, as Gahan says: “It's another important part of the story, because data is frequently not available, and if it is available from the real estate world, it is not necessarily validated nor comparable. It's a hole.”

Will real estate still be an alternative asset class by the time Gahan has finished? “It is ridiculous that real estate is still an alternative asset class,” he says.  “It’s a 30 trillion dollar asset class and it has characteristics which are particularly attractive in the environment in which we live in today, and indeed as we go forward, given its income elements. The whole financial services world is gearing itself towards income-related products, because that is what is missing.”

Real estate will be discussed further at Europe GRI 2019 on 11-12 September in Paris.

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