Tradition and innovation can rub shoulders – Part 2

In part one of this blog series, we explored how innovation remodelled the investment industry. In this part two, we review how innovation has streamlined the initial public offering (IPO) process, and how IPSX, the world’s first regulated stock exchange for real estate, is democratising commercial property investment – by Richard Latter

Online brokers and real-time data

 
We have come a long way since investors had to rely on their high street bank or a full-service stockbroker firm to execute trades.

The rise of the internet, and the development of online share platforms over the last two decades, has made it easier for anyone to access global stock markets at the press of a button or two.

Mobile trading apps allow investors to buy and sell shares, monitor portfolios, and receive real-time market updates directly from their mobile devices. This has made investing more accessible and convenient.

Today, individuals can open online accounts within minutes and trade shares directly through user-friendly platforms such as Hargreaves Lansdown, AJ Bell, and Interactive Investor.

These online platforms give investors all the information they need to make informed decisions, allowing them to access a wide range of stocks, track real-time market data, view research and analysis, and execute trades directly through these platforms. These options increasingly give investors the option to hold their shares portfolio within stocks and shares ISAs and/or SIPPs.

Innovative, newer entrant Primary Bid complements these online platforms, giving all investors fair access to IPOs and public company fundraises, at the same time and price as institutional investors.

Platforms also now offer a range of enhanced features for investors, including dividend reinvestment plans and stock screening tools – including basing investment decisions on environmental, social and governance (ESG) criteria.

These platforms also give their clients the opportunity to apply for shares in IPOs alongside institutional investors. Clients can express their interest and submit applications for shares through the platform and, if successful, they are allocated shares at the IPO price.

The critical aspect of this innovation is that it makes investing in a range of different asset classes a far more democratised process, removing the traditional barriers to entry that left many individual investors ‘shut out’ from investments like commercial real estate. Just as share ownership was once the sole preserve of wealthy merchants, we are now giving everyone the chance to participate.

In this respect, blockchain technology is the most exciting innovation for investment into commercial real estate, particularly for investors who want to build up their exposure to this well-established asset class.

The multiple applications of Blockchain

 
Blockchain can enable ‘fractional ownership’ of commercial real estate assets, allowing investors to own a portion of a property rather than having to pay the full purchase price. This fractional ownership model lowers the entry barrier and further enables smaller-scale investors to participate in commercial real estate investments (in the same way that they can with IPSX) which were previously inaccessible due to the prohibitive costs of buying outright.

Importantly, blockchain also offers a transparent and indisputable ledger where transactional information and ownerships are recorded. All property details, historical records, legal documents, and due diligence reports can be stored on the blockchain, making it accessible to all relevant parties, and no-one else.

Shareholders can also feel confident that records stored on the blockchain are tamper-resistant and can be audited at any time. Using blockchain technology, commercial real estate investors can enter ‘smart contracts’ that fully automate and enforce terms such as rental income distribution or property management fees.

Making commercial real estate sustainable

 
As we noted in our first blog, innovation often comes from adversity, and the climate crisis is the greatest challenge we all collectively face. Progress will not be truly innovative unless it is sustainable, and if the UK is to get close to its ambition to achieve net zero carbon emissions by 2050, significant work needs to happen to improve the UK’s substantial number of ageing and energy-inefficient buildings.

The UK committed under the Paris agreement to a plan to cut emissions by 68% by 2030, compared with 1990 levels. The 2030 pledge, boasted of as “world-leading” in the run-up to the COP26 summit in Glasgow in 2021, is vital to get the UK on track to meet the long-term 2050 goal, and will be closely scrutinised by other governments.

Newly introduced regulations will go some way to making UK buildings more energy efficient. Refurbs will be expensive, but through IPSX, real estate owners can raise capital from the public markets while retaining economic ownership of their commercial real estate assets, retaining anything from 0% to 100% of the shares in the operating company, subject to certain free float requirements. Under this model, Issuers can phase their capex spend, rather than having to raise all the funding in one go and then sit on the cash until it is needed

What does the future look like?

 
The Digitisation Taskforce, chaired by Sir Douglas Flint, is driving forward the modernisation of the UK’s shareholding framework and aiming to end the use of paper share certificates 30 years after the first attempts to do so. Estimates of the number of certificates held vary from 8.6 million certificates to 10 million, about half of which are in the same five companies. Eliminating certificates would save issuers millions of pounds per year, as well as the obvious environmental benefits.

It will also not be too long before the technology you have been reading about in the media becomes a reality for investors – helping them to gain a better understanding of a what a property is used for, where it is located, and the reasons for its valuation. We expect all commercial real estate investors will soon be using products like Apple’s recently launched ‘Vision Pro’ headset to take a virtual tour of any building they are considering buying shares in.

Instead of the days when only the big investment managers had access to a company’s senior management, very soon investors will be able to sit in a virtual room alongside a chairperson, CEO or CFO and ask the questions that matter to them. Technology will have other useful applications too. You could take a walk around a proposed new development, visualising what it will look like when completed. You will be able to find buildings with a barcode or QR code that can be used to download investment details or even an IPO prospectus. These are current innovations that will soon be applied to investing in commercial property.

IPSX: blending innovation with a traditional asset class

Innovation takes many forms. Some of the most effective examples are those that provide a different way to accomplish what is already considered a trusted concept. IPSX offers a new way to participate in one of the oldest and most traditional asset classes there is – commercial real estate.

 
By Richard Latter, Director of Distribution at IPSX, the world’s first regulated stock exchange, dedicated to trading commercial real estate.