Plans for the first real estate investment trust listing on the London market in three years and the largest in a decade have moved forward with the publication of the the initial public offering prospectus and confirmation of backing from three cornerstone investors.
Special Opportunities REIT is targeting a fundraise of £500 million, comprising an initial placing, an offer for subscription and cornerstone subscriptions of ordinary shares of 1 penny each in the capital at an issue price of 100 pence per ordinary share.
Commitments have been received from three investors GoldenTree Asset Management, TR Property Investment Trust and other Columbia Threadneedle investments fundsm and the Bhavnani family office, to subscribe for between 104 million and 119 million ordinary shares – or £104 million to £119 million – in total, on the basis of the target initial issue.
The company will close applications for the IPO on 11 June 2024.
It says it will take advantage of the cyclical nature of the UK real estate market through opportunistic investment and active management of commercial properties, investing at what it believes is the bottom of the market. It also says there is a unique set of circumstances meaning that it believes very high-quality properties are being sold by distressed and highly motivated sellers, often at less than their already depressed current market values.
The REIT adds that the management team has a pipeline of portfolio and single-asset deals against which it expects to rapidly deploy and gear the IPO proceeds. It says the depth of this pipeline and the relative lack of competition should enable the it to be highly selective.
It plans to focus on "high-quality, but under-managed, UK commercial property assets with low and reversionary rents and structurally supported sub-sectors, including student accommodation, industrial, data centres, retail parks and budget hotels, where rental growth is expected to outperform".
It is targeting a minimum realised 12% to 15% annual internal rate of return, with the potential to deliver an internal rate of return in excess of 20% per annum.
It is promising a dividend of not less than 3 pence per ordinary share for the period to 30 June 2025 and a dividend of not less than 6 pence per ordinary share for the year to 30 June 2026.
The management team comprises former LXi REIT Advisors colleagues Simon Lee, Freddie Brooks, John White and Rob Ward. The board has non-executive directors Primary Health Properties founder Harry Hyman as chair and former Workspace chief executive Jamie Hopkins as senior independent director.
There will be £4 million invested by the management team and non-executive directors at IPO.
It expects to maintain a net loan to value ratio of 25%, with a maximum net loan to value ratio of 35%.
It says the market is characterised by structural oversupply, driven largely from defined-benefit pension funds exiting their property holdings both through open-ended funds and insurer "buy-outs", following a surge in DB schemes reaching surplus as the gilt rate rose significantly over the last 18 months.
There is also a lack of appetite from major UK real estate lenders to refinance some existing loans where loan-to-value ratios have risen to unsustainable levels following the recent asset repricing. There is also a significant backlog of unfunded development opportunities and an increase in the supply of sale and leaseback opportunities as tenant operators seek to pay down debt to avoid an increased interest burden eroding profits.
Harry Hyman, chair of Special Opportunities REIT, said in a statement: “With current property market conditions closely mirroring those in other cycles that have signalled the bottom of the market, we expect to capitalise on the recent dislocation in UK real estate capital markets.
"We have a strong and highly experienced internal management and independent voard, who are materially co-investing, and a fully aligned performance-based management remuneration structure and low cost base that provide strong shareholder alignment. This ensures that the management ream is highly incentivised to deliver the minimum realised 12%-15% annual internal rate of return for shareholders which we are targeting, with the potential to deliver an IRR in excess of 20% per annum, both comprising income and capital growth, and an attractive regular income return.”
Special Opportunities REIT would be the first property trust to join the London market since October 2021 and the £350 million AIM listing of Life Science REIT. It would also be the largest flotation by a REIT in more than 10 years.
There have been no launches since leading UK real estate stocks took a hit in the wake of the Liz Truss government's mini Budget in 2022, with the familiar story of company share prices trading at steep discounts to net asset values continuing. Independent Living REIT's planned listing was shelved immediately after the mini Budget, while GCP Co-Living REIT, a closed-ended investment company, paused its marketing of a proposed £300 million initial public offering in February 2022 "in light of the events in Ukraine".
The group says the REIT would have an advantage over existing ones in a recovering market because of its lack of legacy assets.