Banks Rush to Build Capital via Property Sale Leasebacks

Financial Times - May 28, 2009

Several billion pounds worth of European corporate property is expected to be sold in the next few months as businesses look to free capital from their property assets.

This week, Credit Suisse placed the first of its Canary Wharf buildings on the market following a lengthy review, and more companies are expected to follow, particularly in the financial services and retail sectors.

CB Richard Ellis, which has been instructed to sell 20 Columbus Courtyard for Credit Suisse, estimates that it has more than €4bn (£3.5bn) of sale and leasebacks alone set to hit the market this year in Europe. This includes the sale and leaseback of HSBC’s headquarters in London, Paris and New York.

Though the market is reaching its lowest point, many corporate owner-occupiers are motivated by the advantages of additional liquidity.

Many also hold properties at depreciated historic cost for accountancy purposes, meaning that selling now gives a financial boost even with a slump in values.

There are a number of sectors where leasebacks make sense, according to Matt Pullen, CBRE’s head of European global corporate services, as companies look to raise money without damaging businesses. “It is a strategic leveraging of business assets,” says Mr Pullen.

In a report last week, property intermediaries Cushman & Wakefield forecast that banks would increase sale and leasebacks to raise capital in the next year, particularly those that have received state cash injections. Selling real estate has a strong benefit for banks’ tier one capital ratio, a key measure of balance sheet strength.

Credit Suisse, among the better capitalised banks with a 14.1 per cent tier one ratio, appears under no pressure to raise capital.

Other banks, including UniCredit, HSBC and BBVA, have committed to releasing capital via European real estate schemes, said Cushman & Wakefield, and more would follow later this year.

Matthew Stone, head of Cushman & Wakefield’s occupier strategy team, said: “Most European banks need to raise cash but the traditional routes of equity or debt are now significantly more expensive.

“The major European real estate sale-and-leaseback programmes that have been launched are probably only the tip of the iceberg in 2009. Those banks now part-owned by national governments, in particular, offer excellent covenants.”

Going against the current has been Santander, which in an apparent sign of its relative strength last month bought the building occupied by its Abbey business in London from British Land. Some agents say other robust groups are starting to investigate the merits of buying the freeholds of their leased premises while prices look cheap.

Outside the banking sector, sale and leasebacks have been triggered by acute financial difficulties. In March, the New York Times raised $225m in deal with WP Carey in order to help pay off debt, for example.

Michael Evans, director at Jones Lang LaSalle, said sale and leasebacks in the retail sector were now likely to be a focus, given pricing in the sector.

Overall, recent sale-and-leaseback activity has been motivated by very different reasons from those that dominated at the peak of the property boom, when many groups, particularly in the retail, leisure and banking sectors, were keen to cash in on highly priced assets.

Then, a clutch of banks sold their London offices, according to King Sturge’s James Beckham. Deals struck in the boom years included Standard Chartered, Merrill Lynch, Citi and ABN Amro, as well as HSBC first time round.

According to Jones Lang LaSalle, European corporate property disposals have more than doubled over the past four years. Sphere: Related Content