European corporate asset sales hit a record high in 2018, with a growing range of new – and in some cases unique – prospects for investors to consider across the region.
The number and scale of specialist net-lease and long income investors is set to grow.
Last year, corporates in Europe raised as much as US$19.7 billion from disposals across a range of sectors. In recent years, the likes of KPMG in London and Edmond De Rothschild’s Swiss business have sold their own real estate and signed leases to remain. In the case of KPMG, Hong Kong’s Kingboard agreed to lease the 14-storey Canary Wharf office tower to the accountancy firm for 25 years.
“Sale-and-leaseback remains the main route for corporates wanting to unlock capital,” explains Nick Compton, Head of Corporate Capital Markets at JLL. “Corporates’ objectives of maximising capital and the need to preserve operational flexibility often conflict.”
A range of sale-and-leaseback structures exist for corporates and a variety of factors have changed the relationship a corporate has with its owned property, with the long-anticipated changes to lease accounting standards, which came into play in January, being among the most prominent.
Compton says specialist investors in long-dated sale and leaseback real estate, often referred to as “Net Lease” investment in U.S. markets, are increasingly showing an appetite for collaboration and partnership with the corporate throughout the sales process.
The most common occurrence of this is when a landlord offers the tenant a high level of flexibility to operate, on the provision that the lease guarantees income.
“The property investors attracted to this sub-set of the market are reacting to – and importantly, working with – corporates,” he says. “It’s logical when investors are reassured by the safety of long term commitments from investment grade corporate tenants.”
Increasingly, the degree to which the asset is critical to the corporate’s business operations has become a significant marker for investors – particularly when it can the quality of the credit is more speculative.
Direct forward-funding of new assets for corporates is just one way investors are increasingly interacting, says Compton.
Last year, M&G Investments agreed to finance and develop the GBP 265 million London headquarters of Anglo American/De Beers.
But investors are also partnering with corporates to buy properties that are close to lease expiry or vacant.
“Collaborating allows the parties to potentially share the upside when the occupier commits to a longer lease.”
Corporates are however very sensitive to who they partner with and tend to apply robust counterparty due-diligence – price is rarely the sole factor in making their selection, Compton says.
Not all sale-and-leaseback options work for all investor and corporate relationships, Compton says. The benefits of strip income, for example, where an occupier can buy back the property for a nominal fee after typically 30 plus years renting it, need to be carefully evaluated.
“Although they are popular in the public sector, for corporates the sheer span of time a strip income arrangement is in place for redefines long-term,” he says. “If it looks and feels like a bond, then corporates may simply ask why not simply take that route?
“A more traditional 20-year sale-and-leaseback can achieve a number of the same objectives, provided the terms are aligned with clients’ core ambitions.”
Reasons for selling
The ownership of a corporate can also play a part in the decision to sell, with differences in the way a Fortune 500 firm or private equity-owned corporate may behave and opportunities for investors may consequently vary.
“Private equity owned corporates may be more opportunistic and more market-focused,” he says. “So releasing real estate value may in that case be a more tactical decision.”
Compton says the emergence of more specialised investors is likely if corporates continue to pursue the sale of assets they own.
“A property company that has the skill set and attention to detail to be well-aligned with the corporate and that can show it understands the importance of the asset to its business can take advantage of the situation,” he says. “Take the manufacturing sector, where typically capital can be released from the sale of surplus real estate to a specialist landlord who understands business needs and the mission critical nature of the asset.”
Compton says more opportunities could present themselves, but success is more likely for investors that have a collaborative approach aligned to the corporate.