What is an Equity Fundraise on London House Exchange?
Equity Fundraises are a means of strengthening a given property’s financial position and provide the means by which shareholders can voluntarily protect their interests in light of difficult market conditions. This is done through new equity investment from shareholders (existing and new) of property SPVs, in return for the issue of new shares. Funds are raised to pay down mortgage debt and cash deficits (where applicable), while units are sold in an orderly fashion to further pay down debt. Properties in question require additional capital on account of uneconomical mortgage debt, in light of significant interest rates rises.
Which properties are included in the Equity Fundraises?
Properties will be selected on a case-by-case basis. As we outlined during the original Nov-Dec 2022 Equity Fundraise process, properties that failed to successfully raise equity will require further measures. Where a property's financial position is unsustainable, particularly due to high mortgage interest rates, shareholders will have a choice between the following two options:
A. Equity Fundraise; with the funding requirement determined by the financial position of the property in question. Funds raised will be used to strengthen its financial position while units are sold in an orderly manner to maximise value.
B. Auction Sale; units to be sold at auction as soon as possible; we have been advised that auction sales typically result in approximately 20% discount to fair value.
The outcome of this vote will determine the approach taken and where an Equity Fundraise has been voted for by shareholders we will proceed to undertake this process.
For further details of the Equity Fundraises and property specific financial information please click here.
Why are you undertaking an Equity Fundraise?
We have been adapting to the rising cost of debt since January 2022, using all available options, including:
- Maximising gross rent and seeking cost efficiencies
- Reduction/suspension of dividend payments
- Utilising substantial cash surpluses, with excess funds going towards repaying mortgages
- Accelerating unit sales with the proceeds used to pay down mortgage debt
Since December 2021, the average loan-to-value (LTV) ratio has reduced from 52% to 46% today.
However, rates have risen significantly and strong rental performance is being offset by large increases in the cost of borrowing. The average mortgage rate has increased by over 100% in the 12 months to December 2022, from 3.1% to 6.3%. On certain properties within the portfolio the cost of interest is not sustainable over the medium- to long-term.
Without a stronger capital base and a reduced mortgage, these properties risk being unable to cope with further interest rate rises - whilst this is not imminent today, in the extreme, there is a risk of mortgage default.
The aim of the Equity Fundraises is to reduce mortgage loan-to-value ratios, in turn reducing monthly interest payments. This will enhance resilience to future uncertainty and further rate rises and strengthen the financial position of properties that are successful in their raise.
Who can invest?
The fundraises are open to all new and existing investors, but shareholders in each property are guaranteed an allocation directly proportional to their shareholding e.g. if a shareholder owns 1% of shares, they are guaranteed an allocation 1% of shares in the fundraise. If they choose to take-up this allocation, they will be protected from dilution. Excess investment will be scaled back, whereby existing shareholders will have their allocations protected and all other investment will be scaled-back proportionately to equal the Target Fundraise.
When is the Equity Fundraise taking place?
Dates and times will be announced to shareholders, but will all follow the following 28-day process.
Voting process: Shareholders will have 14 days to select between Equity Fundraise or Auction Sale.
Equity Fundraise process: If voted for by shareholders, this will begin the day after voting closes and will be open for 14 days.
Results announced: This will follow the end of the cancellation and settlement period. Results will be announced on a property-by-property basis. Funds will then be deployed and new shares issued. Where applicable, trading will resume.
How is the Equity Fundraise share price calculated?
The Equity Fundraise share price for a given property is calculated by taking a 50% discount to the Vacant Possession Value (VPV) share price. The inputs for this calculation are shown for every property on the Equity Fundraises page.
Won’t more shares being issued dilute my current equity position?
Shareholders in each property are guaranteed an allocation directly proportional to their shareholding, with acquisition of the full allocation protecting shareholders from dilution. Participation is not compulsory, but if not taken up, will lead to dilution of your shareholding (see Equity Fundraises page for dilution on each property).
What does dilution mean for shareholders?
If shareholders do not invest and purchase their allocation of shares in the Equity Fundraise their holdings will be diluted. This means that the percentage you own of the overall investment decreases and your shares are therefore worth less. Owning less of the underlying investment means you are less exposed to capital downsides and gains. Despite dilution, the underlying asset value remains unchanged and successful fundraises benefit all shareholders regardless of dilution on account of strengthening the financial position of the property.
Why are London House Exchange not just selling these properties?
Where possible, we are already selling units in the properties undergoing Equity Fundraises. We will continue to do this in all cases, and the Equity Fundraises allow us to conduct these unit sales in an orderly fashion. Shareholders will have voted to undertake an Equity Fundraise, rather than sell units at auction, which would potentially crystallise significant losses for investors, with auction sales typically resulting in approximately 20% discount to fair value.
What difference will this make to the property’s financial position?
The size of the fundraise for each property is determined by the size of the current mortgage, any cash deficit on the property’s balance sheet and the ongoing process of unit disposals. The funds raised will be used to pay down mortgage debt and cash deficits, while unit disposals continue with proceeds from these sales also being used to further pay down mortgage debt. This will result in a significant reduction in interest expense and mortgage repayment risk, strengthening the financial position of these properties. In some cases, the combination of a successful Equity Fundraise with unit sales will eliminate mortgage debt on the property entirely.
What happens if I don't participate?
Participation is not compulsory, but non-participation will lead to dilution of your shareholding. If this Equity Fundraise process fails, these selected properties will continue to require additional capital and we will have to consider either more accelerated means of disposals, which may result in disposal values significantly beneath market value or further Equity Fundraises at an even deeper discount.
Are there any London House Exchange fees?
We are waiving our usual transaction fee on investment. The Equity Fundraises will increase the amount of client equity invested, on which London House Exchange charges 0.7% p.a. +VAT.
What happens if the Target Fundraise is exceeded?
Excess investment will be scaled back to the Target Fundraise. Within this, existing shareholders will have their full allocation protected.
What happens if the Target Fundraise is not achieved?
If the amount raised is less than 50% of the Target Fundraise, the fundraise will fail and investors funds will be returned to them. If the amount raised is 50% or greater than target, the fundraise will complete.
How do I participate?
Please follow this link to see the properties and their respective financials that shareholders have voted to undergo the Equity Fundraise process. Each property has a link to invest. If you are a shareholder in any of the properties, this will be highlighted in your dashboard and you can invest via this link also.
What are the benefits of participation?
The Equity Fundraises are open to all investors. For shareholders in these properties, acquisition of further shares mitigates dilution and protects existing capital from potential mortgage default. While these properties currently require additional capital to pay down uneconomical mortgages, this does not change the value of the underlying asset. The 50% price discount provides an opportunity for capital gains, however it is important to remember investments carry risk to your capital so please read all available information before investing.
What are the risks of participation?
As with any investment your capital is at risk so please read all available information. Participation involves the usual risks of investment on the London House Exchange platform as outlined in our Key Risks section here. There are specific risks with investment in the Equity Fundraise, including but not limited to the risk of further capital being required or dilution should e.g. (i) the fundraise not be successful, (ii) market conditions deteriorate further, (iii) we are forced to sell at loss of capital, etc.
Under which legal structure are these shares issued?
These shares are issued on the same terms as the original share offering, under a nominee arrangement with the nominee being the legal owner of the relevant SPV. The nominee holds those shares on your behalf and you will be entitled to all the economic benefits as the ultimate beneficial owner. The nominee is a UK Limited Company wholly owned by London House Exchange called Property Partner Nominee Limited. Please refer to clause 2 of the Terms and Conditions here.
Will I still be liable for Capital Gains Tax?
Yes, gains achieved on shares acquired are subject to Capital Gains Tax (CGT) in the same way as any other shares acquired on our platform. London House Exchange does not provide tax advice and advice on personal tax affairs should be sought from an independent regulated advisor.
What are the next steps if the Equity Fundraises are not successful?
We will assess each of the properties that failed their Equity Fundraises and decide on the next course of action. We will announce along with the results of each round of Equity Fundraises.
Can I cancel my investment?
Yes. All investments made through the London House Exchange platform come with a 14-day 'cooling off' or cancellation period - as is typical for many investment products.
How do I cancel my investment?
Please email email@example.com using the same email address that is registered to your London House Exchange account, stating the investment made and property name that you would like to cancel. The team will confirm the request and revert back to you once completed.
Can I reallocate funds once I have cancelled investments or when funds are returned to me from Equity Fundraises that failed?
Yes - once funds have been returned to your London House Exchange account these can be invested on the Exchange in the usual way.