Property Week - March 6, 2009
Troubled occupiers are looking to raise funds by selling and leasing back their properties.
Last month it emerged that Banco Bilbao Vizcaya Argentaria (BBVA) was in talks with global fund manager RREEF to sell and leaseback €1bn (£894m) of its property assets. The Spanish banking group, which last month sold its Madrid headquarters to German fund manager Deka in recent weeks, was following in the footsteps of its Italian counterpart, UniCredit. In January, it banked a €280m (£250bn) profit when it placed a domestic portfolio, including its Milan headquarters, into a fund, sold 62% to investors and agreed to lease the properties back for 18 years.
Over the last few weeks more companies have announced they are looking to do the same, now that their access to traditional sources of cash has been closed off. Real estate sales could be the only way to raise capital, as the debt markets look set to remain closed for the rest of the year and bond issues are so expensive that they are no longer cost-effective – assuming the firms issuing bonds can find buyers for them in the first place.
In a bid to refinance its debts, the New York Times Company is set to raise $225m (£157m) from investment firm WP Carey by selling part of its Manhattan headquarters. European manufacturer Infineon Technologies also said last month that it is considering doing the same.
The recent spate of activity began in January 2008 with Banco Santander’s disposal of almost all its properties in Spain. It sold the portfolio for €4.4bn (£3.9bn) and generated a net capital gain of €1.7bn (£1.5bn), €281m (£251m) more than it expected.
Since then, CB Richard Ellis estimates that 600 deals were completed across Europe, which represented 19% of all transactions for the year. John Wilson, head of CBRE’s corporate strategies group for Europe, the Middle East and Africa, believes this trend will continue in 2009, and says the firm is about to put €3bn (£2.7bn) of sale and leaseback property on the market.
Wilson says leasebacks are becoming increasingly popular not only with banks, but with manufacturing and pharmaceutical firms too. ‘The manufacturing industry has probably been the worst hit,’ he says. ‘It was continuing to make things in the hope that the economic downturn would be a short blip, instead of trading down or trying to reduce costs. But when the banks foundered, the drawbridge went up and corporations could not borrow the money they needed. Now they are stuck.’
Wilson says real estate sales can be the most cost-effective option for companies, despite the fall in property prices.
‘The advantage of sale and leasebacks is you don’t have to pay the money back,’ he says. Wilson adds that CBRE is receiving an unprecedented number of enquiries from firms that are looking to sell, even though they realise they may do so at discounts to book values.
In the US, professional services firms are anticipating the same. ‘There is hesitation right now because corporations are unsure of how to price their assets,’ says Peter Capuciati, executive vice-president of tenant representation firm Studley. ‘There is no market to mark to. But I think this will be momentary and companies will come to accept lower valuations because they have to. Real estate is the only game in town.’
Hope over experience
But aspirations alone do not a market make. The lack of finance for any kind of transaction means that sale and leasebacks, like any other type of deal in the present market, will not be easy for investors to complete.
Buyers are still reliant on the debt markets, and are more wary than ever before of the risk of tenants defaulting. This means they are being highly selective.
Tom Quigley, managing director of WP Carey, says the firm is looking globally for sale and leasebacks, but he is sceptical that there is enough cash to meet the demand. ‘We are seeing more deals [on offer], but there isn’t enough capital around to satisfy it,’ he says. ‘The lack of finance makes it hard to get deals done.’
Quigley says the lack of debt will preclude many corporations from being able to offload their property. ‘For many buyers, a deal will only make sense if you can borrow a substantial amount of the purchase price,’ he says.
General Motors is one company that appears to have been frustrated in its attempts to sell and leaseback its assets. In November, the carmaker put $750m (£524m) of properties on the market, including its Renaissance Center headquarters in Detroit. But it has not sold any of these properties to date.
Julian Lyon, manager of European real estate at General Motors, agrees that lack of finance is an obstacle. ‘The sale-and-leaseback market was better two years ago because there were more buyers with cash and substantial debt finance,’ he says. ‘The pool of buyers for these deals is very small because buyers are looking for chunky yields to reflect the absence of debt.’
With €1bn (£894m) of equity to invest in Europe and $2bn (£1.4bn) to invest in Asia, property fund manager MGPA is one would-be buyer. But the economic climate has deterred it from deals that involve a lease to a single tenant.
Alex Jeffrey, CEO of MGPA’s European operations, says: ‘We have looked at a number of portfolios, but we are often concerned about the tenant’s covenant. The companies that need to sell owner-occupied properties today are often those with lower creditworthiness. But even for stable companies, there is a higher risk of default because of the economic downturn. This is the factor that will restrict the markets.’
German open-ended fund manager Union Investment is also on the lookout for opportunities. In December, it bought the Portico building in Madrid and leased it back to tourism firm Grupo Marsans. Union says it is ‘deeply interested’ in deals in good locations for properties that can accommodate various uses, but says it is finding it hard to uncover good deals.
Karl-Joseph Hermanns-Engel, managing director of Union, says: ‘First-class investments are not readily available at the moment. For us, credit assessment is getting more and more important. And because these deals are often for a single tenant, we have to check risk very thoroughly.’
For many would-be investors, the collapse of Lehman brought home the risk of tenant default. Quigley says WP Carey is seeking deals with ‘recession-resilient companies’ – such as utilities firms and food retailers, which do not rely on discretionary spending – and that it is avoiding riskier operations such as car retailers. ‘We were always very credit-focused, but in the current climate we are only seeking deals with high-quality companies.’
The chaos surrounding valuations has also made it difficult for owner-occupiers to know what prices they should be asking for. However, Quigley says he is seeing a lot of properties on offer at initial yields of 8% or more.
‘We walked away from deals because pricing was too aggressive, and have since been proven right,’ he says. ‘The debt markets are still as fragile as they were in 2008. But we are seeing some deals with good-quality assets and at prices which make sense.’
Though corporations are turning to the property markets, many are likely to be thwarted in their attempts to dispose of assets and raise the cash they need. Until the banks start lending again, only a few lucky owner-occupiers will find the help they need from real estate. And when the debt market does return, selling assets may not be such a good opportunity.
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