Democratising Real Estate Investment

Access to direct commercial real estate investment opportunities has increased significantly since the global financial crisis, "democratising" what was once an area of investment open only to investors connected to this industry via their professional advisers or to the limited number of syndicators in the New Zealand market.

Whilst access to this relatively exclusive sector has expanded, technology is leading the industry towards new methods of participation and ultimately, possibly, to a true democratic, fractionalised structure. In this short article we discuss syndication in New Zealand and outline what is happening elsewhere around the globe.

Syndication in New Zealand has its origins both in the financially constrained banking environment that existed prior to the 1980s and to the deregulation of that same era. This regulatory transition created a banking crisis, leading to an asset price boom boost cycle, the sale of state owned BNZ, failure of many high profile companies and, importantly, to a demise in the availability of bank credit. Commercial property was a particular victim.

Opportunities were however, created; firstly to acquire arguably mis-priced real assets and secondly, in the absence of bank credit, to fund the acquisition of those assets. Understandably it was those who were most connected to the chaos, namely the solicitors, accountants and other advisers, who saw the opportunities unfold.

What followed was a steady rise in non-bank lending and property syndication, funded by the trust accounts of those opportunistic advisers, with some practices spinning-off and formally establishing mortgage or syndication businesses. Moving forward a decade, and in the run up to the GFC, syndication became very popular as the traditional buyers of real estate stayed out of the market. There were failures amongst these new entrants but some of those pioneers remain and are now the most established, reputable and successful operators in the market. However, despite this expansion the syndication sector still remains relatively small, dominated as it is by a handful of participants.

The operating model used by all is to pool together money from a group of investors to buy a property (or properties as is increasingly the case). Models differ slightly between syndicators with some concentrating on wholesale investors only whereas others open offers to retail "mum and dad" investors, the key difference typically being the minimum amount of money required to invest.

In essence however, the investment structure remains the same - pooled capital acquires a property, which is then managed by the syndicator for a fee (some reasonable others not so much!). The investment term is typically undefined (open-ended) meaning that an investor will not be able to get their money out unless the property is a) sold, which requires the agreement of the other investors or b) if they can sell their share of the property to another investor. Both forms of exit can be problematic firstly because of a lack of consensus on the question of sale amongst shareholders and secondly because a formal secondary market for property shares does not yet exist. It is therefore important to understand the nature of the investment structure and how the property is likely to be managed and perform over the implied investment term before investing.

But is this market about to change?

In the UK and USA new entrants with new methodologies are shaking up the property investment sector. As aspects of PropTech and FinTech merge, new platforms designed to meet the needs of the modern real estate investor continue to appear. The most notable, and the one with the longest incubation period, is IPSX, the "world's first regulated securities exchange for commercial real estate".

"IPSX is an exchange dedicated to the initial public offering and secondary market trading of companies owning single institutional grade real estate assets and multiple assets with commonality".

More can be read about IPSX's background and offering on its website (here) as a full analysis of the company is beyond the scope of this article. In short however IPSX is a UK marketplace which connects investors with real estate investment opportunities, within a fully regulated exchange. The model provides advantages such as liquidity via its secondary trading platform, improved transparency and perhaps real-time valuation. These advantages address many of the pinch points in the traditional syndication model, especially the ability to trade shares and exit an investment, which has long been an issue for investors in open-ended, illiquid syndications of single assets.

IPSX might also provide a pathway, model and framework that could translate easily into the New Zealand market given our strong appetite for the sector. Such a platform could expand the investment options available in our limited capital markets, and also provide off-shore investors seeking exposure to NZ property with a trusted, regulated, transparent market.

IPSX is also interesting given the nature, scale and reach of its own investors. One of the cornerstone investors is M7 Real Estate ("M7"). They're a pan-European investor with ~EUR5bn FUM across 825 assets in 13 countries. In December of last year M7 acquired the Mailbox retail centre in Birmingham for £190m and in January announced their intention to issue shares for the asset via the IPSX exchange to "open up this large commercial asset to smaller investors". If the listing proceeds successfully it will validate the platform and others will no doubt follow, including perhaps other significant shareholders in IPSX such as British Land.

Notably, M7 have also made it to New Zealand's shores with their investment in Jasper a new entrant to our syndication market. Jasper completed its first test syndication last year and is gearing up to issue more offerings in the coming months.

Jasper provides a technology-driven marketplace and investment management platform, that brings together commercial property operators and investors, to facilitate the efficient, transparent, and fractional ownership of commercial real estate. They are planning on providing a secondary market in 2020, that will allow investors the potential to exit their investment, providing greater liquidity in a traditionally illiquid asset class. Jasper maintain this marketplace should enable them to provide lower fees, transparency of data reporting, improved liquidity, and true flexibility across investment opportunities.

Jasper has invested heavily in advanced technology to ease the on-boarding process. Investors are able to use Jasper's fully integrated investor accreditation process to verify their identity in a matter of minutes, either from their mobile or desktop. Technology is also being used to help investors see investment highlights, analysis, photos and diligence information in a fully digitised prospectus.

If the commercial real estate investment sector opens up to become a truly democratic marketplace, which would ease pathways to ownership, then questions of asset management capability and brand come to the fore. These questions arise because successful property ownership is not just about today's investment; it's a complex business involving an understanding of urban economics which concerns growth, tenant demand, the changing natures of work and trade, and of regulation and environment. As this market matures these questions should be at the forefront of an investors' considerations when choosing an investment manager.

Published by Tascott & Co 3rd March 2020

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Tascott & Co is a commercial real estate investment manager, who provide advice on the syndication market and debt and structured finance, together with direct investments and asset management services. For further information about how we can assist please contact:

Toby Scott

Director

Email: toby@tascott.co.nz

Tel: 027 5299 879