SALE AND LEASEBACK: ATTRACTIVE OPTION FOR RAISING CAPITAL
According to a report just published by CBRE, corporate sale and leasebacks represent a viable, effective and competitive way of securing capital in an age when cash is all-important and the stigma of ‘selling off the family silver’ is a fast-retreating myth.
The acceptability of the sale and leaseback route was helped by the ‘watershed’ moment when the €1.6 billion HSBC headquarters deal was completed in London in 2007 and the sale of KarstadtQuelle’s €4.5 billion department store portfolio across Germany. Closer to home both Bank of Ireland and AIB have undertaken substantial sale and leasebacks of their Headquarter properties and branch networks.
The first obvious reason that sale and leaseback represents an attractive option is that there has been very little capital available in recent times, largely because of the limited availability of bank credit. Other key advantages are:
•Allows a corporate body to raise capital through the business but, unlike a loan, this capital does not have to be paid back;
•Can be cheaper than placing a corporate bond or raising equity;
•Meets the interest of the shareholders;
•Should not adversely affect banking covenants;
•Introduces transparency, and hence discipline, to occupational costs;
•Can be tailored to suit occupational requirements eg, lease terms, break options, fixed/maximum rent uplifts, expansion option, buy-back option etc (subject to preserving the investment nature of the lease);
•Can be structured to release any latent development value of the property;
•Mergers and acquisitions can be part funded through sale and leasebacks.
These advantages are not always obvious and many corporates prefer to occupy their premises indefinitely without carrying out a cost/benefit analysis. However, in an environment where conventional forms of finance have become severely restricted and prohibitively expensive, sale and leaseback transactions represent a viable alternative for raising capital through and for the business. This is evidenced by the act that sale and leaseback activity experienced rapid growth in recent years, from a €6.9 billion market in Europe in 2004 to €46 billion in 2007 involving more than 750 separate transactions. – a 585% increase over four years. In fact such disposals went from comprising 6% of the European investment market in 2004 to nearly 20% in 2007.
Clearly, in 2008, falling values reduced the relative attraction and volume of asset sales so occupier disposals in Europe effectively halved in value to €22.5 billion. However this still comprised some 794 transactions and maintained the sector’s 19% share of the total investment market. In the first half of this year, an exceptionally quiet period for investment turnover, a further €4.1 billion in occupier disposals accounted for around 17% of the market. These figures reinforce CBRE’s view that sale and leasebacks have established themselves as an important part of the property investment market. This is because sale-and-leaseback transactions generally create long and well-secured income streams for the purchaser – precisely the kind of investment many are looking for in the current more risk-averse climate.
In terms of sectors, certain other patterns are emerging. The retail sector has continued to increase its share accounting for just over 50 per cent of occupier disposals in the first half of 2009, with offices accounting for 23 per cent and industrial 9 per cent. This is something of a turnaround: office disposals accounted for almost half of all European sale and leaseback transactions in 2007, dropping to 31 per cent in 2008 as retail and manufacturing started to become a growth sector.
Interestingly, in the first half of 2009, Spain and Italy led the way, with Italy accounting for the largest transaction value at 24% of the European market. This largely reflects the disposal of a portfolio of 180 high street bank branches by Unicredit for €530 million. This was followed by Spanish banks Caixa Catalunya and BBVA totalling €251 million and BNP Paribas with €250 million in Paris.
CBRE’s research has found that many investors are returning to the property market having invested relatively little in the last few years. The current focus is on the main European markets such as the UK, France and Germany. However Ireland is now appearing on investors’ radar screens on the basis of offering good value. Sale and leasebacks are inherently attractive to these investors in offering a secure income stream on a new lease. A good example is the AIB branch on Grafton Street, offering a unique opportunity to acquire a prime retail investment on secure terms.
More generally, the potential for continued growth in sale and leaseback activity is immense: the value of European real estate assets still in the hands of corporates is estimated at around €2.25 trillion – 12 times the average level of European real estate investment turnover over the last five years. Therefore it represents a real and present opportunity.
Investment Director, CB Richard Ellis