Gavin Bishop | 30 November 2012

Sale and leaseback of industrial premises increases financial flexibility

Sale and leaseback of industrial premises increases financial flexibility

Corporate businesses occupying their properties should consider sale and leaseback transactions in the current financial and economic climate.

The greatest benefit of a sale and leaseback transaction, which is typically a commercial real estate transaction in which one party sells its corporate real estate assets to another party and then leases the property back, generally for a period of seven to 10 years, is the ability for the owner-occupier to increase their financial flexibility.

By becoming both the lessee and the seller, the owner-occupier negotiates from a position of strength to ensure they maintain uninterrupted control of the facilities and perhaps more importantly, they liberate capital to invest in their core business.

Depending on the quality of the property being sold, investment yields are currently between 8 and 10%, and freeing up equity at these rates presents opportunities for companies to redeploy this capital into core business activities with higher rates of return, or to reduce higher cost borrowings.

In the context of easing returns from cash and uncertainty surrounding the performance of equity markets, steady and long-term yields make this type of transaction an investment just right for the times.

Another big benefit of a lease and leaseback transaction is that it can provide an alternative to conventional financing, which is particularly useful now, in a climate where it can be difficult to obtain financing from banks. The feasibility of this, however, will depend on where commercial property investment yields currently sit in relation to the weighted cost of internal capital and external sources of finance.

Now is a great time for corporates to be considering sale and leaseback transactions, with market demand for this type of investment product also running high. There is a lack of prime-grade investment stock in the market, particularly in the industrial sector.

When we say prime-grade investment stock, we mean product that is of high quality and with a strong covenant, with long-term leases in place. There is limited supply of this type of product on the market, but with investor demand for it currently being very strong, owner-occupiers willing to sell their assets can be in a position of strength to secure strong prices and negotiate attractive leaseback terms.

 

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