Companies are increasingly turning to their operating real estate assets to generate liquidity amid the global economic downturn, property services firm Jones Lang LaSalle has found.
Though property values are falling around the world, corporates are still opting to sell assets often in “sale and leaseback” transactions, meaning that the company pays the new owner of the property rent for the privilege of continuing to occupy it.
Jones Lang LaSalle expects corporate asset sales to reach $34 billion by the end of the year. This would be an increase on $30.4 billion in 2007 and $20.7 billion in 2006.
“We’ve seen a dramatic shift in sellers that occurred as a result of the credit crunch and corporations need to access affordable capital outside the debt markets,” Steve Collins, managing director of Jones Lang LaSalle’s International Capital Group, said in a statement.
Private equity firms and private equity real estate firms see corporate property sale and leasebacks as potential investment opportunities. Moor Park Capital, a London-based private equity real estate firm, for example, is soon to close a fund targeting sale and leaseback opportunities in Europe, according to city sources. WP Carey, a New-York based firm, specialises in such transactions and has entered into a string of acquisitions so far this year.
Jones Lang LaSalle says 56 percent of corporate sales are occurring in Europe, while around a third are in the Asia Pacific region and the Americas account for 9 percent.
Kenneth Rudy, capital markets president at the firm said it had predicted corporates would account for a larger slice of the property sales pie this year. “That's proven true,” he said. “Corporate real estate is more in focus than ever before with finance and treasury executives. The own versus lease question is being asked with increasing frequency, especially for capital raising as the credit crisis has turned corporate liquidity upside down.”
The most active investors in the sale-leaseback market today are those who do not require as much leverage and have maintained relationships with wiling lenders.
The rise in sale and leaseback transactions contrasts with the overall decline of property deals around the world, which were down 42 percent in the first half of the year. At $233 billion, investment volumes have fallen back to levels last seen in 2005.
“The commercial mortgage backed security market has become virtually non-existent, and debt financing for real estate transactions has become more expensive and significantly more restricted,” Rudy said.
The Jones Lang LaSalle report also shows that the globalisation of real estate continues with cross-border transaction continuing to account for 45 percent of global transactions, just slightly lower than the 46 percent reported for 2007.
Brazil has proved more resilient than most given the boom in commodities taking place. However, most regions have seen major volume falls. Transactions in the Asia Pacific region are down by 5 percent to $52 billion from 2007. Southeast Asia witnessed the largest investment volumes in the region, with its strong growth profile continuing to draw investors. Singapore bucked the overall trend by registering a 20 percent increase over 2007.