Why sale and leasebacks are in demand during covid-19

Investor interest remains strong after corporate real estate disposals reached record levels in Europe and Asia last year.

The covid-19 crisis will continue to drive sale and leaseback transactions, as cash-strapped businesses increasingly turn to different routes to generate liquidity.

“Any site or building owner in any industry which is in distress or not trading at the moment will likely be doing a sale and leaseback to generate liquidity and help them survive,” says Oliver Fraser-Looen, joint head of regional investment and head of retail investment for EMEA at Savills.

“The economic uncertainty is forcing businesses to think about flexibility and agility,” adds Regina Lim, head of Asia-Pacific capital markets research at real estate consultancy JLL. “The benefits of unlocking liquidity through sale and leasebacks is even more obvious. Owners can use the extra capital to pay down debt, reduce interest expense, or reinvest to drive the next stage of growth.”

A notable transaction this year was Aviva Investors’ £107 million acquisition in May of a UK logistics warehouse complex from clothing retailer Next, which then leased back the property. In March, Investcorp announced it had purchased Cola-Cola’s Belgium headquarters for €88 million, the first sale and leaseback for the alternative investment manager.

JLL also reported an increase in “short-term” sale and leasebacks of non-core assets, such as former headquarters offices as well as retail and leisure properties. With such transactions, the sellers plan to vacate the space after seeing out leases with a typical length of one to five years.

On the rise

Sale and leasebacks have been on the rise in recent years, according to a report by JLL. It noted that 2019 was a record year for both European and Asian corporate disposals of real estate across a range of industries. In Europe, disposals of corporate and owner-occupied real estate in 2019 raised €23.1 billion across more than 460 transactions, thereby trumping the previous record of €17 billion in 2018.

Sale and leaseback activity has remained robust in Asia-Pacific. According to research from Real Capital Analytics, such deals accounted for 8.6 percent of commercial real estate investment volumes in the first five months of 2020, just shy of the 7 percent recorded throughout 2019.

“Traditionally, Asian businesses have preferred to own a property over leasing it,” says Lim. “But this is gradually changing as asset prices continue to increase.”

Public market volatility in Asia has led listed companies to seek sale and leasebacks to generate liquidity, according to a June report from CBRE. As previously reported by PERE, CBRE estimates around 20 percent of listed companies in the region are at risk of liquidity pressure and hold a total of $430 billion of real estate on their balance sheets, thus indicating “further opportunities for sale and leaseback deals in the months ahead.”

European sale and leaseback activity, however, has slowed down in 2020, amounting to €3.05 billion in the year to date across offices, industrial and retail, according to Real Capital Analytics. This represents just a third of the €9.27 billion recorded over the same period last year.

In the US, net-lease investment volumes increased by 34.6 percent to $78.9 billion for Q1 2020, marking the highest quarterly total on record, according to a report by CBRE.

Seller downsides

However, Fraser-Looen says activity is also being curtailed by the fact that sale and leasebacks have a number of downsides for sellers, such as being locked into a 25-year lease.

According to a report by Clifford Chance, other potential disadvantages include the seller potentially having to relocate its business if it cannot negotiate a renewal of the leaseback on “open market terms” when it expires; and the loss of flexibility for the seller, which will have less discretion in the use and operation of the property.

“But on the flip side, people see [sale and leasebacks] as guaranteed income for 25 years,” said Fraser-Looen.

Securing sufficient liquidity to maintain operations continues to be an immediate priority for corporate real estate owners. Sale and leasebacks are one route that allows companies to unlock cash that is tied up with their real estate, thus helping them to weather the covid-19 storm.

Supermarkets in high demand

When it comes to sale and leasebacks, Fraser-Looen notes that supermarket properties are the only assets bringing in higher pricing now than before the pandemic. “Some people are saying retail will be in trouble, but the demand in supermarkets is going to be even higher and the yield is going in more than before,” he says.

He says he is seeing approximately 10 buyers for every long-let supermarket property, compared with an average of three before covid-19 struck: “The buyer pool for supermarkets is huge and very diverse. They are also very appealing because of the long-term income.”

Around €2.4 billion of retail properties were sold and leased back in Europe last year – the highest level since 2010, according to a report by Savills published last month.

Although overall transaction volumes have dropped off amid the pandemic, the few sale and leasebacks in the region that were signed during the first quarter mostly involved supermarkets.

One transaction in the works is the portfolio sale of 32 Spanish supermarkets that Savills Aguirre Newman is handling on behalf of Mercadona, Spain’s leading food distributor.