Clients on our platform can exit their investments at any time by offering their shares for sale on our Exchange. But, of course, the price and speed of that exit depends on the size of the holding being sold and levels of demand from buyers of shares.
For this reason, the ability to exit has always been backed-up by the underlying UK property market – a process we call the 5-year exit mechanic.
It is a process that ensures that all investors in a property, no matter how large or small, can exit at a price that fairly reflects the underlying value of the asset. Either everyone who wants an exit gets one, or the property is sold on the open market.
How it works
Step 1 – Prior to 5th anniversary: Determining the fair market value of the property
LHX will commission an external RICS accredited surveyor to inspect the property and provide a full Red Book valuation report.
We will also speak to local agents to assess the likely demand for the property to provide a cross section of professional opinions and guidance on the value and how long it could take to secure a sale in current market conditions.
Step 2 – On the 5th anniversary: Shareholder vote
Trading on the Exchange will be suspended.
Payment of future dividends will be suspended, with any net rental income accumulating within the property’s accounts, until the 5-year exit process is complete.
Shareholders will vote on whether or not they would like to sell their full shareholding in the property at the independent surveyor’s valuation.
The vote will be open for 2 weeks following the launch.
At the time of this vote, shareholders should be aware that if the property is sold, there can be no guarantee that the surveyor’s valuation will be achieved. If the best offer for the property is more than 5% below the surveyor’s valuation, in all but the most exceptional circumstances, shareholders will be given a further vote.
Step 3: Block listing of shares for sale
Shares belonging to shareholders who have voted to sell are pooled together and listed for funding at the surveyor’s valuation in a form similar to a new listing fundraise on the platform.
All purchase costs and fees incurred at the point of acquisition 5 years earlier will have fully amortised, enabling new investors to acquire shares at the underlying net asset value of the property, with no property purchase costs. As with all purchases of shares, stamp duty reserve tax will apply at 0.5%.
If all the shares are sold, the block listing will have been successful in enabling investors who wanted to exit at the surveyor’s valuation, to do so. The property will resume trading on the Exchange and dividend payments will recommence. Please note, from 1 February 2023, if properties are retained on LHX through their respective 5-year anniversary processes, it will be the last time a 5-year anniversary process is run on those properties – a new annual process will replace the 5-year cycle, timed to coincide with our independent revaluations at 31 March each year (you can find out more here).
Step 4: Sale of the property
If the block listing is not fully funded after 2 weeks, the underlying property will be marketed for sale, seeking offers at or above the surveyor’s valuation.
LHX may decide to keep the block listing open once the property has been listed for sale, if fully funding the remaining shares is feasible within a reasonable timeframe and that this outcome would deliver a better result for investors.
Reserve price: LHX will work to secure a sale at or above surveyor’s valuation. However, this cannot be guaranteed and we will consider lowering the asking price if no offers have been received. Unless there are exceptional circumstances, if the best offer for the property is more than 5% below the surveyor’s valuation, shareholders will be given a further vote.
Sales period: duration of the sales period cannot be guaranteed, but could typically be expected to take 3-9 months for a single flat and longer for a multi-unit block, where the units are sold sequentially to maximise price. The sales period would also take account of the expiry dates of tenants in occupation.
Treatment of tenants: we aim to provide high quality homes for our tenants and ensure that they are treated fairly. Where possible, we will manage tenancy agreements to ensure that tenants do not have long outstanding tenancy terms at the point of a property’s 5-year anniversary. However, we will not seek to evict tenants ahead of 5-year anniversaries and properties are likely to be tenanted when the exit mechanic vote takes place.
In most cases, the best sale price will be achieved by vacating the property and offering it for sale with vacant possession. Properties will therefore be marketed for sale when the tenant has vacated and the property has been prepared for sale. As a result, there could be a period of months between the conclusion of the block listing of shares and the property being marketed for sale.
When a property is sold (in its entirety i.e. all units within the block), the net proceeds of sale will be returned to shareholders, following the voluntary liquidation of the SPV (the company that owns the property and in which shares are traded). Typically this will include the deduction of sales costs, liquidation costs and corporation tax paid on any capital gain. For properties with liabilities, such as mortgages or amounts owing to the SPV central fund, these liabilities will be repaid in full before the proceeds of sale are returned to shareholders. Any rental profit accrued within the SPV will be paid to shareholders along with the proceeds of sale.
From time to time, LHX may, at our discretion, contact shareholders to propose the sale of a property outside of the standard 5-year cycle, where we believe this offers a significant performance advantage. In these cases a vote is held, requiring a 75% majority of voting shareholders to agree to a sale before proceeding. Where investments are deemed to be in distress situations due to high mortgage costs, LHX may, at our discretion, proceed to sell units within the investment where it is in the investors best interests to do so.