In recent years, a swathe of UK real estate investment trusts have listed on the Channel Islands’ International Stock Exchange. So why are the islands so attractive to UK REITs – and what sets them apart from listing in the City?
UK REITs – real estate investment trusts – have been one of the Channel Islands finance sector’s great success stories in recent years.
Earlier this year, The International Stock Exchange (TISE) announced that it had become the listing venue for more than 40% of all UK REITs – 37 out of a total of 90 – with eight joining the exchange by the end of May.
The overall total has risen from a 25% market share in 2016 and 30% two years ago. TISE has established itself as a clear platform of choice for new REITS coming to the market.
In addition to the listings, a significant proportion of REITs are incorporating in Guernsey and Jersey, drawing on an ever-growing body of expertise in the islands among lawyers, administrators and other professional advisers.
And while the underlying value of property assets held by REITs either listed or domiciled in the Channel Islands is difficult to quantify, it certainly runs into many billions of pounds.
For most investors, property owners or fund managers who opt to form a UK REIT, the primary choice is between listing it on the London Stock Exchange or on TISE.
A couple are listed elsewhere – one on the Aquis Stock Exchange (AQSE) and one on the International Property Securities Exchange (IPSX).
The decision to opt for the Channel Islands will depend primarily on the nature of the REIT concerned.
Robert Milner, Partner at law firm Carey Olsen, set up some of the first REITs on TISE and sits on the committee that helped draft the listing rules.
“The REITs that will find the happiest home on TISE are those that are set up for the benefit of institutional investors – sometimes only a couple of institutional investors – and those that are set up and marketed solely at sophisticated investors, with limited trading,” he says.
Milner points to one of the main advantages of TISE. “It recognises that, where you’ve got a structure that has a small number of institutional participants, a proportionate approach can be taken to forensic disclosure.”
Cost and flexibility
One specific advantage for the institutionally owned REIT, Milner explains, is that on TISE there is no applicable equivalent to the London Stock Exchange’s free float requirement, which means that 25% of all shares must be available to the public to buy.
TISE has recognised that institutional investors can represent a large number of underlying beneficial owners, in line with HMRC’s own approach, he adds.
Nick Terry, a Jersey-based Chartered Surveyor and a Director of the real estate team at Ocorian, believes cost and flexibility are fundamental advantages to listing a REIT on TISE as opposed to the LSE alternative.
“Cost is a significant factor, especially for a smaller REIT, which could even be formed to own a single asset such as a London office building owned by three or four underlying investors,” he explains.
At the same time, the role that TISE plays for REITs has evolved, says Terry. “You previously saw TISE being used effectively as a technical listing in order to qualify as a UK REIT, but more and more it’s being used as a platform for a real traded listing.”
Historically, says Terry, if someone wanted to use a REIT to raise capital, they would have tended towards a London listing on the FTSE 100, FTSE 250 or AIM.
“What you’re seeing a little bit more now is that TISE is starting to attract structures that are looking to raise capital, because it’s becoming better known and it’s cheaper, easier, well regulated and so on.”
The latest figures suggest that TISE is gaining momentum in terms of its ability to attract REIT listings.
James Hill, Partner and specialist adviser to the UK real estate sector at Mourant in Jersey, says: “I think it’s a combination of increased interest in REITs among institutional investors and the attraction of TISE for those sorts of REITs.
“Some of it goes back to the UK government, which has been keen to make the UK an attractive location for holding real estate assets. It has been seeking, through its policies to attract global capital, to support some of the changing dynamics in the UK’s society and economy.
“So, on the one hand you have the growth of the build-to-rent sector, which requires institutional support. And then you have the changing nature of the economy, and the growth in logistics assets to reflect the growth in the digital economy.”
UK and overseas institutional investors helping build out those assets are attracted to REITs, says Hill.
Three years ago, TISE amended its listing rules to attract more of these structures, Hill adds. “The listing rules are now simple, precise and offer a lot of certainty. So TISE has played an important part in terms of seeing the demand and then adapting.”
Nevertheless, TISE is not suitable for all REIT listings, says Milner. “The main disadvantage of TISE is that there’s not as much liquidity in the market as there would be in London – that’s just inescapable,” he says.
“So, if you need genuine deep liquidity, then you would probably go to LSE; TISE is not really suitable for – and does not target – retail structures. If you want to have 10,000 investors on day one, it’s probably worth your while to undergo the cost and hassle factor and go to the LSE.”
For the Channel Islands, a decision to incorporate a REIT in Jersey or Guernsey represents a second bite of the cherry.
“The REIT must be tax-resident in the UK but does not have to be incorporated in the UK,” says Hill.
“Jersey and Guernsey companies are quite attractive for institutional investors. We have flexible companies, law and regulatory regimes, and these are well respected jurisdictions that are familiar to the London market.”
With these attributes in mind, it can make sense to consider the option to incorporate if you are listing on TISE, Hill says. “If you are already engaging with us to do the listing, then why not add it on?”
Anyone setting up a Jersey or Guernsey-based corporation needs legal advice, a listing sponsor and a corporate administrator. All three can be provided under one roof by firms in Jersey, adds Hill, alleviating the need to shop around.
Channel Islands companies offer other benefits. “One is being able to make distributions on a cashflow basis, which you can do under Jersey and Guernsey law,” says Terry.
“It basically means you can get your rent in, you know what your costs are for the next 12 months, and so the rest you can push out to your investors as a distribution.
“Just about anyone, whether a pension fund or an individual, ultimately makes investments in real estate because they want the income return. And so being able to move that money efficiently up the structure is very, very beneficial.”
Flexible structure
UK REITs offer a structure that serves different types of property equally well – from offices and warehouses, to retail, nursing homes and student accommodation. And that is reflected in the nature of the REITs that have listed and incorporated in the Channel Islands.
Hill picks out two sectors – ‘sheds and beds’ – as being in favour among investors at the moment. That comprises logistics facilities on the one hand, and various forms of accommodation – from build-to-rent to student housing – on the other.
“The REIT structure works well with pretty much any class of UK real estate, but you can only have so much development component – because the UK rules state that a certain proportion of your income has to be rental income,” says Milner.
“So we tend to see portfolios of fully developed, fully let properties where there’s maturity and stability in the portfolio.”
What’s clear is that there is a lot more REIT activity in the pipeline, whether that be through the formation of entirely new REITs or the conversion or even migration of some existing structures.
Among those joining TISE this year is RDI REIT, which moved from being listed on both the LSE and the Johannesburg Stock Exchange after being acquired by Starwood Capital Group for £467.9m.
Carey Olsen advised Starwood on the acquisition, and says moving to TISE enabled RDI to retain its REIT status after it could no longer comply with the listing rules of the other stock exchanges under its new ownership.
The REITs success story in the Channel Islands looks set to continue – but is there a lesson that can be learned from that?
“I think it’s an example of the Channel Islands playing to our strengths, which is that we’re small jurisdictions and are therefore nimble,” says Hill.
“We are able to adapt legal and regulatory requirements very quickly, according to demand from the market, whereas London can’t.”