Investors Look to Sale and Leaseback

The Sunday Business Post Online - November 22, 2009

Corporate sale and leasebacks represent a viable, effective and competitive way of securing capital in an age when cash is all-important.

The stigma of ‘selling off the family silver’, which had been associated with this practice, is now 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, along with the sale of Karstadt Quelle’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 that it 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 and meets the interest of shareholders.

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 fact that sale and leaseback activity experienced rapid growth in recent years, from a €6.9 billion market in Europe in 2004 to €46 billion - and more than 750 separate transactions - in 2007.

This represented a 585 per cent increase over four years, and such disposals went from comprising just 6 per cent of the European investment market in 2004 to nearly 20 per cent in 2007.

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 per cent 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 per cent 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 this year Spain and Italy led the way, with Italy accounting for the largest transaction value, at 24 per cent 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 Britain, 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, which offers an 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. It therefore represents a real and present opportunity. Sphere: Related Content