Sale and leaseback volumes have dropped dramatically in the 15 years since the first wave hit the property sector – but they are refusing to go down without a fight.
Large retailers are still selling freeholds, and they enjoy near-perfect success rates in the auction room, according to Essential Information Group figures shared with Estates Gazette.
“The investment market – and particularly the private investor – loves the sale and leaseback,” says Duncan Moir, Allsop’s head of commercial auctions.
The appeal lies in having a tenant that wants to occupy a building immediately, and makes a commitment to do so by entering into a relatively long lease, which will often contain fixed uplifts or RPI references at review.
“They’re still very attractive to buyers,” agrees Vijay Parikh, partner at Harold Benjamin. He adds: “We find that there are clients who are always looking [for them]. They get a brand new lease, and they know the tenant’s been in that location for a period of time.”
This is prime private investor territory. Properties are often fairly small, forming part of a branch network for a multiple occupier. Given the access auctions offer to private investors, they have tended to be the preferred route of disposal, says Moir.
Speedy completions are sometimes a deal-breaker, which can also act against private sales. Parikh remembers working on an agreement with Ladbrokes in December, which had to be completed by the 23rd of that month for financial reasons. “The only way to achieve that kind of timing was by auction,” he says.
EIG’s data does not capture all auctioned-off sale and leaseback properties, but shows a clear downward trend since 2008. This marked the end of a Barclays sale and leaseback project led by JLL that raised over £1bn, of which more than half was through the auction room.
The figures show at least 429 sale and leasebacks were sold at auction in 2007 for companies including HSBC, Lloyds Pharmacy, Prezzo, WH Smith and Carphone Warehouse, as well as Barclays.
Separate data obtained from Acuitus and Allsop, the two main auction houses in this field, reveal that between them they sold a comparatively meagre 22 sale and leasebacks last year.
Negative image
Sale and leasebacks were tarnished after they were seen by some commentators to contribute to the downfall of businesses including Southern Cross and Woolworths. But the main reason for the drop-off in recent years appears to be the simple fact that few businesses own their own buildings any more.
Many firms now choose to enter into an agreement that splits capital into a long-term lease and a sale, rather than go down the sale and leaseback route, says James Miller, partner at CMS Cameron McKenna.
“The long leases are generally at lower rents,” he says. “This enables the seller/operator to inject capital into/extract equity from the business and retain a capital interest in the lease.”
The scale of investor concern over the long-term viability of businesses trading in assets partly explains the change, Miller says. “The penny dropped when global banks started going under, that maybe you can’t necessarily take comfort that a covenant that’s AAA one day will be AAA 20 years later.”
Miller has particular experience of this type of long-lease model in the hotel and hospitality industry, in which most of the large, traditional operators have already sold their buildings.
Auction room boost
Despite falling numbers and changing market conditions, sale and leasebacks are still being sold at auction. Which businesses are continuing to go down this route, and why?
Betting shops continue to be active players. The likes of Ladbrokes, Coral, and William Hill have an ongoing programme of business acquisitions, buying small local betting shops that may own their own freeholds and selling on the properties while retaining the trading presence in the location.
More recently, a similar model has been adopted by two groups of undertakers, with £8m sold through Allsop across 24 properties, and two dental groups raising £16m from 60 properties.
Acuitus chairman and auctioneer Richard Auterac admits the sellers’ motivations can be complex, involving a number of factors including cost of capital, taxation and their long term occupational needs.
Ultimately, they may be swayed by the prices driven by continued strong demand for leasebacks among certain investors, he says, adding: “There is a shortage of good quality investments with strong long-term income, and sale and leasebacks will be eagerly sought after by high net worth investors.”
Those considering investing in a sale and leaseback can take comfort that they generally provide good returns, according to Parikh, who also advises buyers to “be careful to make sure that the seller has not set the rent over the market rent… and ensure the fundamentals of location and tenant covenant are not compromised”.
An interesting development has been retailers buying back buildings at the end of their term as tenants, and re-leasing properties. For example, Parikh notes that Farmfoods acquired some of their freeholds during the recession at lower prices than they sold them for. This was a strategy also used by Forbuoys and the company into which it was absorbed, Martin McColl, which saw the value of the assets drop as the leases came close to expiring.
Enduring appeal
Sale and leasebacks are long past their heyday, but have not disappeared. Auterac’s colleague, Acuitus director Peter Cunliffe, fully expects numbers to rise as prices bounce back.
“I wouldn’t be surprised if the pricing gets better and better, that corporates do take advantage of the very keen investor sentiment at the moment,” he says. “They’re paying top prices to get long term income streams.”
But whether the auctions sector will raise as much as £7.6m from a single sale – the amount Acuitus sold a Croydon branch of Barclays for in 2007 – from the freehold stock that remains in the market is debatable. Moir points out that they are driven by volume sellers, rather than single lot sellers, so disposals are “very much dependent on corporate activity”.
Buybacks, the appeal of long leases and pricing uplifts may all encourage activity in the medium to long term. There is no need to perform last rites just yet.
