Can the Mailbox’s IPO deliver? Five takeaways from the prospectus

The first listing on IPSX, a new stock market solely dedicated to real estate, is finally here. Last week, it was confirmed that M7 Real Estate will place its Mailbox site in Birmingham into a REIT and sell shares on the market to raise some £63m. The move is bold and, if successful, could be a game-changer for the real estate capital markets. But as the first deal on an untested market, the challenges too will be stark. Across 273 pages, the IPO prospectus for Mailbox REIT lays out the reasons its management team sees the mixed-use asset as the perfect investment opportunity – and the risks that investors jumping in on the ground floor will face. Here are some takeaways. Birmingham’s office market is in rude health… Birmingham’s office market recorded its highest ever rent last year, when law firm DLA Piper struck a prelet for some 40,000 sq ft at 2 Chamberlain Square at £34.50 per sq ft. At the same time, BT’s prelet of 280,000 sq ft at Three Snowhill is the city’s largest office letting on record. A lack of new or refurbished grade-A stock has pushed rents up, and Mailbox REIT notes that “even with 2 Chamberlain Square and Three Snowhill completing in 2020, a clear supply shortage is emerging which provides a compelling case for further speculative development”. Brexit may encourage companies to move away from the capital, the company adds, and the ongoing relocation of public sector hubs to regional cities should play to Birmingham’s advantage. Office investment in the city during 2019 was also at an all-time high, although the coronavirus pandemic has hit activity so far this year. “H1 2020 has been heavily impacted by Covid-19 with only £5m going toward Birmingham offices,” Mailbox REIT’s prospectus says. “A stronger H2 is expected, with a number of large transactions under offer.” …but Covid-19 means some Mailbox tenants are struggling So far, none of the Mailbox’s significant retail tenants have entered a CVA process, but food and beverage tenants are likely to be “significantly impacted through the end of 2020 and into the first quarter of 2021” by restrictions around the coronavirus pandemic, the prospectus says. Two Mailbox tenants, Cafe Rouge and Zizzi, have entered administration. Although they continue to trade, Café Rouge is expected to close and Zizzi has renegotiated its lease. Pizza Express has proposed a CVA in which its Mailbox outlet would be closed. As at many mixed-use sites, the Mailbox has seen the amount of rent collected fall during the pandemic – from 96.2% for the December 2019 quarter day to 82.3% for March 2020, then 68.7% for June. That means revamping the property to add office space and cut back on retail The property’s largest office tenants include the BBC, software company Advanced and professional services firm WSP. Mailbox REIT now plans to boost the amount of office space in the building by 50,000 sq ft, or 25%, on level 1, which it says will add £1m to the annual rent. The redevelopment is expected to start about six months after the listing, having received planning permission in June. “The directors and the [alternative investment fund manager] are cognisant of negative trends in the retail industry and believe that should those trends continue, the outlook for the property remains positive as the directors and the AIFM expect that existing retail space could be converted to office space and thereby benefit from the higher rent for office space compared to retail space,” the REIT says. A single-asset listing means investors will be doubling down on Brum Listings of single assets on IPSX will offer investors very specific opportunities to back particular towns or cities – even particular tenants. For some investors, that could well prove more attractive than buying stock in a REIT that has focused on a diverse portfolio. But as Mailbox REIT’s prospectus highlights, it could also magnify the risks of being tied to a specific market. “The company’s performance may be affected significantly by events beyond its control impacting Birmingham and the West Midlands,” the REIT says. “For instance, any decision by a major car manufacturer to curtail car production in the West Midlands could have a significant knock-on impact on a range of engineering and support businesses for the car industry. This would undoubtedly impact the Birmingham property investment and occupational market.” M7’s roles could raise eyebrows M7 is not only the investor floating the Mailbox on IPSX – its M7 Real Estate Financial Services subsidiary will act as AIFM and the group is also a shareholder in the stock exchange itself. According to the prospectus, M7 has an indirect shareholding of 13.4% in IPSX, with chairman Richard Croft holding 0.5% and nine of M7’s 21 shareholders holding about 1.3%. “This may result in the appearance of conflicts of interest around the advancement of IPSX as a new trading platform,” the prospectus says. “The apparent conflict may result in reputational damage to [Mailbox REIT] and adversely impact the price and/or liquidity of the ordinary shares.” Mailbox REIT’s directors say the risks from that relationship are being “sufficiently managed” through a specific conflicts of interest policy and agreements made between M7 and the REIT. To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette