Investors warm to the securitisation of commercial real estate initiatives

Initiatives are taking place on both sides of the Atlantic, which aim to revolutionise the commercial property market. 

Their plan is to allow investors to own shares in individual buildings, as opposed to going to the expense of buying all of them. 

They can invest in a range of share stakes offering a decent income rather relying on third parties to manage a collective vehicle and reinvest it.  

When I talk to family offices, to private banks, the word that keeps coming up is ‘control’. They want to choose what they are invested in, rather than becoming a limited partner…

Over the years, there have been many attempts to securitise property. Each time they have foundered due to the market’s unwillingness to supply liquidity. There is little point in buying shares in a building if you can’t be sure of getting a fair price when you want to sell. 

This time round promoters are more confident – armed with technology, investment banking expertise and a growing awareness that the real estate market is ridiculously inefficient.

They argue that today’s markets can be sufficiently primed with big data to maintain an efficient market and facilitate the launch of Exchange-Traded Funds.

The US initiative is led by Lex Markets which uses Nasdaq technology to power a cloud-matching service whose backers include Greycroft Partners, led by venture capital pioneer Alan Patricof, founder of Apax Partners.

To attract retail investors, Lex will offer lot sizes as small as $100. It has worked extensively with sector participants to add liquidity to the nascent market.

According to a spokesman: “We have interest from market makers to provide continuous two-sided quotes. Lex even plans to allow third parties to create structured products including ETFs and indexes down the line.”

London-based IPSX, whose backers include British Land, also believes securitisations can become sufficiently well traded to lead to the development of ETFs.

ETFs have become an important contributor to equity market liquidity.  Helped by tax efficiency in the US, they have achieved this by creating and redeeming ETF shares to balance supply with demand. High-frequency traders help keep their price close to underlying assets. 

Roger Clarke, IPSX head of capital markets, said: “The corporate bond market developed quickly after Bloomberg started carrying data. Liquidity took off soon afterwards, then we saw people building ETFs, which added to it again. We are thinking about whether we should develop them, because if we don’t, BlackRock and Vanguard will.” 

To generate liquidity, IPSX has opted to use a tech-driven stock exchange served by a battery of market makers. Nasdaq is among its suppliers. IPSX will list groups of similar buildings, while refurbishment and development situations will be offered to institutional investors through a parallel market. It is targeting a minimum lot size of £50 million, designed to appeal to institutions and family offices. The Share Centre is a potential trader of stock and recently signed up as a member of IPSX. Other applications are being processed. 

Clarke says IPSX  and its data can bring transparency to the real estate sector. Investors in real estate funds and companies currently have no choice but to pay hefty fees to third party managers. 

The quality of information they supply is thin, providing managements with cover when decisions go awry. 

They take the credit when values rise, but blame the market when they fall.

One analyst said: “Bringing transparency to real estate has to be a good move. IPSX deserves to succeed. Whether it will attract sufficient liquidity is another matter.” He said family offices were obvious supporters.

Clarke says: “When I talk to family offices, to private banks, the word that keeps coming up is ‘control’. They want to choose what they are invested in, rather than becoming a limited partner. They want to decide when to buy, and when to sell, and they can do this by buying shares in buildings.”

Through IPSX securitisation, landlords selling shares in their buildings supply details on half-yearly valuations, tenant structures, sustainable initiatives, leverage and much more.

The landlords can manage the building, if shareholders are happy with that, or agree to outsource it.

Lex Markets co-founder Drew Sterrett points out securitisation will reduce the grip on the US market currently held by large institutions and their advisers. 

IPSX points out the purchase and sale of single buildings will ease the liquidity squeezes which can bedevil the real estate sector during hard times. Generalised panic has led to the suspension of real estate unit trusts and administration for shopping centre owner Intu.

Clarke says: “There are shops and shopping centres out there, like Intu’s Trafford Centre, which have better prospects than the market believes. But without access to details on individual buildings you can’t see why.”

The Financial Conduct Authority’s decision to regulate IPSX indicates its desire to achieve a more orderly market, with the help of data. The US regulator, the SEC, supports the Lex Markets initiative.