The strength of the equity markets and investors’ rekindled passion for real estate has created the ideal conditions for listing property vehicles, writes Bridget O’Connell.
It is in this environment that the managers of the redemption-hit Brandeaux Student Accommodation Fund have appointed Morgan Stanley to investigate an initial public offering of its £1bn open-ended vehicle.
However, a number of hurdles in transferring a frozen indirect vehicle to the public market will need to be overcome to ensure success.
The first issue relates to current investors’ ability to hold a stake in a listed vehicle.
Brandeaux’s student accommodation fund, which was launched in 2000 and now has a portfolio of more than 40 student housing schemes in 17 UK cities operated under the Liberty Living brand, is made up of retail investors. These investors or funds may not be able to take a stake in the listed vehicle.
One source explained: “You can’t just transfer unit holders into an equity structure because a lot of funds invested in the current vehicle do not have the mandate to invest in equities.”
A second major issue is price. An agreement needs to be reached over a price at which unit holders will be paid for their investment.
Sources expect that values will have gone up since the units stopped trading in July last year when the fund was suspended and closed to redemptions. So should the price reflect a historic value or a current one?
Those investors that can hold their position in the new vehicle might be happy to take a discount and wait for it to trade up to get a premium.
But current investors that want to – or have to – exit will not want to sell at a discount.
And there is the thorny problem of management – a crucial element of any IPO.
Unsurprisingly there are questions over whether the equity market would support current management, including chairman Kay Brandeaux and chief executive Roger Boyland, who were forced to suspend trading in the firm’s entire eight-strong property fund range owing to a lack of liquidity.
One source suggested they could look at floating part of the fund, which would allow those investors looking for an exit to be replaced with those with the ability to hold equities.
However, a small vehicle may not whet the appetite of investors, as Schroders experienced when it attempted the £100m float of WELPIC on AIM a year ago to invest through its existing £873m West End of London Property Unit Trust. It pulled the listing due to insufficient demand from investors.
It is understood that Schroders was originally looking to expand this model into other funds – including one of its large income funds – but put plans on hold after the WELPIC experience.
With all these issues in the mix it looks like it will be a challenge to round up the necessary 75% unit holder support to approve proposals.
In favour of an IPO is the strength of institutional interest in the student housing market, which is moving from an ?alternative asset class to the mainstream.
For the past two years student housing has attracted £2.1bn of investment and in 2013 a new weight of international money entered the UK market, including US companies Avenue Capital and Greystar.
However, if an IPO ultimately proves a step too far, other options include an outright sale of the whole group. It is understood that this has already been explored but again the problem of valuations came into play.
A sale of individual assets could be revisited. It was attempted last year without success, which Brandeaux ascribed to “excess levels of properties currently for sale”.
The last word from Brandeaux is that it is continuing to review various options with the aim of creating liquidity for existing shareholders – including an IPO.
Bridget.O’Connell@estatesgazette.com
