Everyone seems to be doing it but is it really worth the trouble? And just what is a sale and leaseback? In essence a company sells its commercial property and then immediately leases it from the new owner.
There are various benefits in doing this kind of transaction, both for the company and for the buyer. The company is able to free capital from the property while continuing to have use of it. Then there are tax benefits by offsetting lease costs as an operating expense; the seller can improve the balance sheet through exchange of fixed assets, often carried at a below market value, for cash.
There is a one-off profit and loss account benefit reflecting profit realised over book value. And finally it transfers property value risk to a third party on a fully transparent basis
The deal may be set up to allow the company to extend the lease at the end of the term at an agreed rate for example or even to buy the property back in the future.
Using the proceeds of property sales to recycle capital back into the core business, and generate a return on capital that is higher than the cost of funds, is for many an often far more attractive commercial proposition. The disadvantage of this is that while the company improves cash flow by accessing the funds straight away, there will no longer be the potential benefit of future capital growth from the property.
The latest news is that B&Q is going to enter into a sale and leaseback on its 875,000 sq ft shed in Worksop worth an estimated £65million.
The company has already done a £198m sale and leaseback with British Land on a variety of its retail warehouse properties and its parent company Kingfisher has stated that it is seeking up to £300m in sale and leasebacks in an effort to repay debt and expand abroad.
Tesco, another retail giant, has entered into a variety of sale and leasebacks aimed at releasing some £5bn in cash for expansion both in the UK and abroad. In a report about the growth of sale & leasebacks by KPMG Nick Leslau, chief executive of Prestbury Investment Holdings, said: “Tesco is using the heat of the property market to raise cash through sale and leaseback, with options to enable them to buy back investment. That is very smart. “
The retailer’s first two sale and leasebacks generated £636m. In each of these transactions Tesco was advised by KPMG.
In the first transaction, which closed in March 2005, Tesco secured a £366 million property sale and leaseback of 12 stores and two distribution centres to Consensus Business Group, the investment vehicle of Vincent Tchenguiz. Tesco was able to release funds to help its expansion plans, while retaining a high level of operational control over the properties, including rights to make significant alterations and even make property substitutions. Tesco retained a 50 per cent ongoing interest in the properties and secured buy-back options after 10 years and at lease expiry. It’s second transaction secured £270m.
The sale transaction was well above the valuation; according to Revathi Padmakumar of KPMG this highlights “the strength of demand for well structured transactions of this nature secured on strong credits”.
This is particularly true of warehouses of 200,000 sq ft plus says Nigel Godfrey of Gazeley: “There is a huge wall of money that wants a home in property. Distribution property is hot. The reason for this is that these units are large lot sizes and relatively straightforward buildings to manage. There is only one tenant to deal with usually of a strong covenant and that’s why investors want them.”
As an indication the distribution shed investment market is worth £10bn a year and rising. This is small compared to the total property investment market of £330bn but there is a twist, investors like sheds. In the 24 years that they have been monitoring the market IPD (Investment Property Databank) has said that in only three years have investors tried to disinvest in sheds; all other years they have increased their weight in the sector. Therefore this sector remains continually active with an increasing number of transactions and therefore money changing hands.
Lisa Fitch of NAI Fuller Peiser says: “Some of the endless terms on these sale and leasebacks make it the next best thing to a freehold without the dilemma of carrying the facility on the books while giving the certainty of residence.
“The popularity of sale & leaseback lately in general is a new twist on ownership. Many firms also like pre-agreed uplifts as it gives them a clearly defined financial obligations picture against which to forecast cost/revenue paths.”
But is it only for the big boys? Not really. Last year Lane Group entered into a sale and leaseback agreement on its 38,520 sq ft warehouse headquarters based at Portbury in Bristol. The company selected Insight Investments as preferred purchaser after several rounds of competitive bidding. Through a series of negotiations favourable lease terms were agreed with the purchasers advisor Lambert Smith Hampton.
In the end the property was sold for £3.95m and leased back for a term of 20 years with a tenant break option at year 15 at a rent of £325,000 a year. There are five-yearly upward only rent reviews with the rent at year five being reviewed to the higher of open market rental value or RPI. Lane Group used the capital acquired to re-gear the business following a strategic review in 2004. Atisreal acted for Lane Group.
An even smaller deal saw NAI Fuller Peiser acting for Stauff UK in a sale and leaseback with Kilmartin Investments on two building of 18,000 sq ft and 9,5000 sq ft in Scotland.
John Stevenson of NAI Fuller Peiser’s Edinburgh office comments: “Stauff UK recognised that it is very much an investors market at the moment and took the opportunity to raise some capital while continuing to occupy the buildings as part of its UK network of depots as a leading supplier of hydraulic components to industry. The speed of this transaction reaffirms the lack of quality investments on the market today. This property received 12 offers within three weeks of going on the market.”
MWM Property acted for Kilmartin Investments.
In another deal Electrical distribution company Bridisco sold and leased back its 80,000 sq ft distribution centre at Premier Park, Oulton, Leeds. Property consultants CB Richard Ellis, acting for Bridisco, sold the modern premises to Universities Superannuation Scheme for £6.65m. Bridisco has taken an 18-year lease at a rent equating to £5 per sq ft. DTZ acted for USS.
But what happens if you do not own your own building? Well obviously you can’t enter into one of these agreements; however, it is worth considering if you are in a position to move especially as a way to fund a building tailored suit your business needs.