The UK property market is undergoing considerable change as new equity vehicles are launched and old ones prepare to transform themselves into REITs — real estate investment trusts. And these changes present the chance to consider different stock exchanges, including the new stock markets being created across Europe.
European property companies raised €10bn last year and look set to match that in 2006.
The main market of the London Stock Exchange now hosts companies worth more than £50bn, including giants such as Land Securities and British Land, but the main action in recent months has been on the UK’s junior exchange, the Alternative Investment Market. Property companies raised £1.2bn on AIM last year — 30 times as much as in the previous four years.
And just as direct property investors are taking their assets abroad to chase the higher yields available there, much of the money being raised by companies floating in London is being invested outside the UK. Companies have used AIM money to buy properties in western Europe, in the former Communist states, in the Far East and elsewhere.
One of the latest companies to float on London’s junior market is the Japanese Residential Investment Co, which raised £100m with plans to create a £330m portfolio of housing in Japan. It joins companies such as Equest Balkan Properties, Bulgarian Property Developments and China Real Estate Opportunities.
Companies do not have to be UK-based to list on AIM. For example, Dolphin Capital Investors — which has residential developments planned for the Greek, Turkish, Croatian and Cypriot markets — is based in Greece and domiciled in the British Virgin Islands. It nevertheless chose London for its listing, demonstrating how readily borders can be crossed.
It might seem logical for companies to list on their local stock markets but in this context “local” can be defined many ways, even before companies deliberately choose a market independent of their business connections. That 10% of the companies on AIM are not British shows that a large number of businesses are making a choice not to float on their domestic exchanges — and that, having made that decision, they prefer London to the other foreign exchanges.
Many UK directors choose AIM because it is their local market and is probably the most successful smaller companies’ exchange at the moment. But if the company being floated plans to develop in Russia, there is a case for listing there, too — and if most of the investors will be continental, there is a case for choosing a mainland European exchange.
If shares are being issued to local staff it helps them to be able to trade cheaply on a local exchange in their own currency, even though that exchange may impose onerous restrictions on the company or not offer a liquid market or a base of good analysts, and it may trade shares at a discount when exchanges elsewhere would provide a premium price.
Wide variety of exchanges
For example, a company owning German property might choose to list there because the local publicity helps the business — or to list elsewhere, so that tenants do not see its profits reported.
Directors considering floating now have a wide choice of exchanges. For developing companies alone, there are more than 20 exchanges in Europe as well as the main markets, and more are opening despite the need for rationalisation.
Most junior markets have lower levels of regulation and thus lower costs. AIM and some other markets rely on nominated advisers — abbreviated, in London, to “nomads” — and these brokers, banks or accountants vouch for companies, avoiding the need for regulators to pre-vet prospectuses. There is no minimum size for AIM flotations and no specified free-float — the readily tradable shares not owned by founders or backers. AIM investors also avoid capital gains tax on shares held for two years, as well as inheritance tax, and losses can be offset against income tax.
The success of AIM, launched 11 years ago and now hosting more than 1,500 companies, has encouraged the French and German exchanges to launch new fledgling company markets, even though their earlier attempts failed.
France last year launched Alternext, a small companies market, to replace the Nouveau Marché that closed four years earlier because of lack of support. However, Alternext attracted only 35 companies in its first year, including property groups Adomos and Meilleurtaux.
Although it imposes lighter regulation than its parent market and is about 30% cheaper to join, it is still regarded as more bureaucratic than AIM, despite exempting companies from the new corporate governance code and quarterly reporting. It requires a €2.5m free float but capital gains have been made tax-free for institutions to try to encourage support, and Paris already has a strong base of life and pension funds interested in investing.
Germany’s Neuer Markt launched in 1997, was closed in 2003 after the collapse of the dot.com bubble and accounting scandals resulted in the top 50 companies losing 95% of their value. Now Deutsche Borse is also having a second attempt at a fledgling market, launching Entry Standard with lighter regulation than its main markets. Companies can communicate with shareholders via their websites rather than through formal stock exchange announcements, and no prospectus is necessary if shares are being issued to staff or business partners, thus savings costs.
Small companies’ markets
There are many other small companies markets. Italy launched Star in 2001, though it is less flexible than most other European markets, not least because it requires 35% of a company’s shares to be freely quoted. The quality of research in Milan is regarded as high, possibly because there are fewer than 100 companies on Star, most of which are larger than those on other junior markets.
Other small companies exchanges include First North, the new Scandinavian exchange launched by main-market operator OMX, which is aiming at UK investors by allowing documentation in English as well as local languages. Madrid and Iceland have small company exchanges too, and the Republic of Ireland this year relaunched its Developing Companies and Exploration Securities markets as the Irish Enterprise Exchange.
The IEE has been designed to offer almost complete compatibility with London’s AIM, allowing the same documentation to be used for both markets, thus enabling companies to be listed on both. Two of the first companies to join were Abbey, the housebuilder, and Irish Estates, the property management company spun off from Irish Life & Permanent. Fruit company Fyffes put 25 properties into a subsidiary called Bluetooth with the intention of floating a majority stake on the new Dublin exchange.
The Irish takeover code mirrors the UK’s and already Newcourt Group has used the IEE to finance a bid for Ely Property Group.
Dual listing enables Irish companies to retain a quotation in their home country while exploiting the greater liquidity of the London market. Both countries speak the same language, of course, whereas UK companies listing on most other exchanges face expensive translation costs and additional legal bills. However, the UK and the Republic of Ireland use different currencies and, by having euro-priced shares in Dublin, these companies can be attractive to continental investors who prefer the single currency as well as to City investors who prefer sterling.
Entry costs are estimated at about £2,500 for the IEE, compared with £4,000 for AIM, though dual-listed companies must pay both. The Irish exchange claims that additional costs are low because the same lawyers and the same documents can be used for both exchanges, but London bankers argue that Irish companies gain more from AIM membership than a non-Irish company would benefit from a Dublin listing. And while the rules are almost identical, the Irish exchange insists on companies having a minimum €5m market value while London sets no such limits.
One other English-language market hoping to benefit from changes to UK companies is the Channel Islands Stock Exchange, based in Guernsey. It has carved a niche in eurobonds and investment funds, offering a listing facility and screen-based trading. Based on its experience of property funds — there are now well over 100 listed there — it hopes to exploit the introduction of REITs in the UK next year.
Exchange details
The exchange offers an offshore base in the right time zone for UK investors, is accepted by the UK financial regulators, and has a sterling cost base. Listing fees for closed-end funds such as REITs are just £3,000, and being small allows the Channel Islands exchange to be highly flexible: unlike many other exchanges, its listing committee meets every day so can give almost instant decisions to companies asking to be quoted there.
Although Guernsey has an active fund management community, the ease of raising funds depends on the access to new investors or on existing investors, for whom neither the location of the exchange nor its liquidity are of immediate importance. Raven Russia, Anton Bilton’s vehicle for Russian real estate, this year showed how easy rights issues can be when it raised £310m from its own shareholders — twice the value of its flotation less than a year earlier. And whereas a main market such as London’s usually requires shareholders to give prior approval to a major transaction or fund raising, AIM is one of the junior markets that waive that requirement.
There is activity on the main markets too, however. Gagfah and Hahn have recently floated on Deutsche Borse while Alternext’s parent, the main Euronext market, has hosted the €650m offer of ProLogis European Properties by US REIT ProLogis on its Amsterdam exchange. In London, Sistema-Hals, one of Russia’s largest property companies, has just come to the market with a £1bn valuation.
Strong share prices help to explain the eagerness of companies to raise money or seek listings. In London, the FTSE 350 Real Estate index is up by more than 40% in the past year while the FTSE 100 index of the wider market has risen by just 15%. That partly anticipates the benefits of conversion to REITs, but has closed the discount between share prices and net asset values to around 15% at the asset-based sector giants.
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Despite limited liquidity, AIM offers tax breaks, light regulation and no track record |
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Market |
Benefits |
Drawbacks |
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London LSE |
High reputation |
Three-year track recordLSE 25% minimum free-float Pre-vetting of listings Investors approve big deals |
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London AIM |
Light regulation Tax breaks No track record No minimum free float No minimum company size No minimum offer size Listings not pre-vetted No prior approval for big deals |
Limited liquidity |
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Paris Alternext |
Light regulation Small market Institutional support |
Mainly French listings No quarterly reports €2.5m minimum free float |
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Frankfurt Entry Standard |
Light regulation Web-based announcements No prospectus for private offers |
Small market Limited liquidity |
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Milan floatStar |
Web-based announcements Good analysts |
35% minimum free Small market |
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Dublin Irish Enterprise Exchange |
Aim-compatible Dual listing offers quotes in £s and €s capitalisation English language |
Min €5m market Dual listing adds to costs Small market |
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Channel Islands Stock Exchange |
Ready for REITs Speedy administration |
Low liquidity Small equity market |
