Special Opportunities REIT, a new internally-managed REIT formed by the previous team at LXi to capitalise on dislocation in UK real estate capital marlets, has published details of its approach ahead of an Initial Public Offering (IPO) on the London Stock Exchange as it seeks to raise £500 mln (€587 mln).
The firm has already lined up commitments from three cornerstone investors, GoldenTree Asset Management, TR Property Investment Trust, Columbia Threadneedle investments funds and the Bhavnani family office, to subscribe for between £104 mln to £119 mln ordinary shares before the company floats on 11 June.
In a bullish attitude informed by its pipeline, it expects to deploy the initial £500 mln proceeds within 6 months of listing.
Market watchers will take note of how the company views UK real estate. It said it will target 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 claimed there was a ‘unique set of circumstances’ meaning that it believes very high-quality properties are being sold by distressed or highly motivated sellers, often at less than their already depressed current market values.
It also said its significant pipeline of portfolio and single asset deals was in place against which it expects to rapidly deploy and gear the IPO proceeds as it focuseds 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.
Special Opportunities REIT wants to enhance returns through rental income growth and using relationships with tenant operators to enhance the capital value and liquidity of its assets.
This way it states target minimum realised returns are 12%-15% per annum internal rate of return (IRR) on shareholder cash flows, with the potential to deliver an IRR in excess of 20% per annum, comprising capital and income growth and a regular dividend.
Simon Lee, Freddie Brooks, John White and Rob Ward, all formerly with LXi REIT Advisors, comprise the management team.
The prospectus says: ‘Current conditions in the property market closely mirror those in other cycles that have signaled the bottom of the market. The management team believes that investment at this point in the cycle should position the company well to acquire assets which are expected to deliver attractive crystalised returns to Shareholders on a risk-adjusted basis.’
It says structural oversupply has been driven largely from defined-benefit (DB) 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.
In addition, 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.
Meanwhile, there is a significant backlog of unfunded development opportunitie, 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.
The finance strategy is to invest a ‘conservative’ mix of equity and debt capital in commercial properties.
Harry Hyman, non executive chair of the new REIT, said: ‘I am delighted to announce the proposed IPO of Special Opportunities REIT plc, which has been designed to generate returns for shareholders through what we believe to be our best in class strategy, structure and team. 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.’
Deutsche Numis is sole broker & bookrunner.
