What are the implications of the new Listing Rules for property companies?

Introduction

On 29 July 2024, the new Listing Rules became effective (new UKLR), marking the most significant changes to the regulatory framework in over three decades. As confidence in the IPO market starts to slowly return, this briefing looks at the impact of the changes on property companies that are thinking of listing in London.

ESCC or closed-ended investment fund?

The new UKLR created a simplified single listing category for equity shares in commercial companies (ESCC), replacing the previous two tier regime of “premium” and “standard” listings. Closed-ended investment funds retained their separate listing category.

This means that a property company can be listed on either the ESCC or the closed-ended investment fund category, depending on how it is structured and its ability to meet the relevant eligibility requirements. Broadly, the ESCC will be suitable for a property company that has an operating business, whereas the closed-ended investment funds category will be suitable for a property company that is externally managed, invests in real estate assets in a way which is consistent with the aim of spreading investment risk, and any trading activity conducted by it is insignificant in the context of its group as a whole.

Eligibility requirements

Under the old Listing Rules, a property company seeking a premium listing needed to publish historical financial information that covered at least three years and demonstrated a revenue earning track record over the same period. In addition, there was a concessionary route available to property companies that did not meet this criteria if they could demonstrate three years of development of their real estate assets by increases in gross asset value.

These requirements have been removed in the new UKLR, including the concessionary route as it is no longer necessary. This means that a property company with a limited operating history, or one that is pre-revenue, may be eligible for listing on the ESCC.

There have not been any changes to the eligibility requirements for the closed-ended investment fund category, so, broadly, a property investment company must:

• invest and manage its assets in a way which is consistent with its objective of spreading investment risk;
• have a published investment policy; and
• have a board of directors that is able to act independently of its investment manager.

REIT status

One of the requirements of being a UK REIT is that the company’s share capital must be admitted to trading on a ‘recognised stock exchange’, which covers both a listing on the ESCC and the closed-ended investment funds category.  UK REIT status continues to be unaffected by whether the company is listed in the ESCC or closed-ended investment fund category.

Dual class structures

Under the old Listing Rules, weighted voting rights were available to premium listed companies, but could only be held by directors and exercised under specific conditions for a maximum period of five years.

The new UKLR have removed this five year limit and expanded their scope to include not only directors, but also investors, shareholders and employees of the listed company. For non-individual investors or shareholders, such as companies, the weighted voting rights are valid for up to 10 years from the date of listing.

The structure is only available to companies on the ESCC. It is not available to companies listed in the closed-ended investment funds category.

Whilst these new provisions are helpful to founders and shareholders of a property company seeking a listing on the ESCC who wish to maintain control over their company, their use will depend on the appetite of investors during the marketing process of the IPO. In addition, by creating a second class of ordinary share capital, the property company would no longer qualify as a UK REIT.

Continuing obligations

Significant transactions

ESCC companies no longer need to seek shareholder approval for significant transactions (being a transaction outside the ordinary course of business which measures 25% or more in any of the applicable class tests). Instead, these transactions will be subject to enhanced market disclosure.

Investment funds continue to be exempt from the rules on significant transactions where a transaction is in accordance with the scope of its published investment policy.

Related party transactions

Similarly, ESCC companies no longer need to seek shareholder approval for large related party transactions (being a transaction outside the ordinary course of business which measures 5% or more in any of the applicable class tests). Instead, these transactions will be subject to enhanced market disclosure, including the requirement to obtain a sponsor’s fair and reasonable opinion.

Investment funds follow the same rules as the ESCC, save that shareholder approval is required for a related party transaction involving fees or other remuneration payable by the investment fund payable to its investment manager, where such transaction is 5% or more in any of the applicable class tests.

Discount to NAV

Closed-ended investment funds are still prevented from issuing shares at a discount to NAV, unless approved by shareholders, which given the current re-rating that has impacted the sector, is currently making it difficult for investment funds to raise new capital once they are listed.

Prospectus rules

On 18 October 2024, the FCA’s consultation on changes to the Prospectus Rules closed. It is expected that the final rules will be published by the end of H1 2025. The potential key changes include:

• Whilst a prospectus will be required in an IPO, whether on the ESCC or closed-ended investment funds category, the threshold for triggering a prospectus on a further issue of shares will be increased from 20% to 75%.
• Additional disclosure requirements will be required for issuers who identify climate-related risks or opportunities as material. These include descriptions of the issuer's governance arrangements for assessing and managing climate-related risks and opportunities, how these risks are identified, assessed and managed; the actual and potential impacts on the issuer's business, strategy and financial planning; and the metrics and targets used to assess and manage these risks and opportunities.
• A new framework for protected forward-looking statements (PFLS). To qualify as PFLS, the statements must include an estimate of when the event(s) or circumstances are expected to occur and must be understandable, reliable and comparable with actual figures in the issuer's historical financial information. PFLS benefit from a lower liability regime, with liability arising only in cases of recklessness rather than negligence. The aim is to encourage issuers to provide more forward-looking information in their prospectuses.

Should the proposed changes come into effect, then they are expected to reduce the costs of raising capital on the London markets.

Commentary

Whilst there has been a lack of real estate IPOs in London over recent years, as the IPO market starts to open up again, there is optimism that the new regime under the UKLR will encourage more property companies, particularly those that would be eligible for the ESCC category, to consider listing in London. This optimism is further bolstered by the number of listed real estate companies that have collectively raised over £2.4 billion in equity over the last few months, suggesting that investors are open to investing in listed real estate again.