20th October 2017
by James Herlinger, CAIA
The latest regulatory updates announced by the Financial Conduct Authority (FCA), encompass prospective modifications to UK Prospectus Rules, with the aim of moving them in line with new EU Prospectus Regulation. One particular alteration has significant importance within the Real Estate Investment Trust (REIT) industry, which has been particularly lively over the course of 2017 thus far, especially in the social housing and private rented sectors. This new amendment involves prospectus publication obligation thresholds, and states that the requirement to publish a new prospectus on a regulated market is no longer applicable for “securities fungible with securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20 % of the number of securities already admitted to trading on the same regulated market”. This effectively means that the limit for additional amounts of shares which can be issued over a 12 month period, whilst forgoing Prospectus publication obligations, has doubled from 10% to 20%. We anticipate that this modification will encourage UK REIT managers, and particularly impact those funds looking to increase equity in a cost efficient manner.
Another interesting factor regarding this particular amendment is that it is the only update announced in relation to UK Prospectus rules that is effective immediately. There have been other significant alterations announced as part of this update, for instance, in relation to how risk factors should be categorised within Prospectuses, and various other measures that are being introduced with the aim of streamlining the issuance process. Whilst these measures will no doubt have significant impacts, they are not due to come into force until July 2019.
As a result of the aforementioned increase to the exemption from prospectus publication requirement, REITs now have the ability to raise considerable amounts of capital through tap issuances, whilst avoiding the significant placing programme expenses. Generally, the costs of a new ordinary share placing is 2% of the total amount raised, whereas, the cost of a tap issuance usually averages out at around the 1% mark due to their significantly smaller administrative and legal expenses, for example, the cost of publishing a new prospectus. In addition, the speed at which substantial capital can be raised is set to be another benefit from this particular update for REIT managers. Typically, a REIT tap issuance can be announced and completed within a matter of days, however, the overall process associated with placing programmes is somewhat longer, and can take months to formally finalise. Furthermore, the increased level of flexibility in capital raising that has arisen through this update, could prove to be essential for REITs with capital already at or near to full deployment. With an additional 10% of equity available to be raised at greater speed and reduced cost, funds can take advantage of current market opportunities with greater ease. This will likely offer managers of REITs which are already fully deployed encouragement in being able to continue implementing their investment strategies, and this in turn should provide them with an increased opportunity to deliver superior returns to their investors.
Langham Hall has been providing administration and depositary services to REITs since 2014 and in the past 12 months has been appointed on 5 successfully launched REITs. The ability to offer clients a ‘one stop shop’ solution for administration, company secretarial, depositary and host-AIFM services ensures Langham Hall adds value, efficient and effective information flows, and experience in servicing REITs.
For more information regarding our REIT services please contact:
Head of UK Client Services
Direct: +44 20 3597 7969
Direct: +44 20 3597 7900