Sale-and-leasebacks: are they making a comeback?

Sale-and-leasebacks, once a staple of European real estate markets, seemed to have largely disappeared in recent years. Could they now be set to make a comeback?

‘There have been a few sale-and-leasebacks this year,’ Christian Kadel, head of capital markets Germany at Colliers, told REFIRE. ‘There was a transaction in Hamburg with Euler Hermes, which was a sort of sale-and-leaseback. And Daimler is doing two sale-and-leasebacks for around €600m+ combined. However, sale-and-leasebacks make less sense in the current market when corporates can borrow at 1%.’ (Daimler declined to comment.)

New York-based global net-lease REIT W.P. Carey has been active in the European sale-and-leaseback space for around two decades, with a particular focus on Germany, according to Arvi Luoma, managing director, head of European investments at W.P. Carey.

‘We’re working on a few net lease projects in Germany, including in the industrial sector,’ he told REFIRE. ‘W.P. Carey is an opportunistic real estate investor, so we don’t focus only on the Big 7. We’ll also look at smaller cities that might be strong, for example, in telecoms or in the automotive sector. We like the German market; we’ve been investing there since 2003 and today it is our biggest investment market in Europe. We typically invest between €300m and €500m in Europe every year and I’d be happy to do half or even all of that in Germany.’

Sale-and-leasebacks are part of the group’s three branch long-income investment strategy, according to Luoma: sale-and-leasebacks, built-to-suits – whereby it finances the construction of a new customised facility and enters into a long lease upon completion – and acquiring a net lease property from an investor to give them an exit, providing there’s still more than 10 years left on the lease.

Sale-and-leasebacks gaining traction

For Tilmann Weeth, senior portfolio manager at owner-managed group of companies, Accom Immobilien, sale-and-leasebacks are gaining traction: ‘Particularly at a time when the economic outlook starts looking less promising, more companies owning their office or production facilities will start considering their options, including sale and lease-back strategies, to secure liquidity and room for potential countercyclical investments,’ he told REFIRE. ‘In this context, the sale and lease-back segment seems poised for further growth, particularly in Germany where the share of companies owning major amounts of real estate is considerably higher than in other markets.’

In April, Luxembourg-based LeadCrest Capital Partners was set up as a new fund management business specialising in sale-and -leaseback transactions across Europe. The group wants to target what it views as Europe’s untapped sale-and-leaseback market, according to managing director and portfolio manager Georges Asmar.

‘In volatile macroeconomic environments, loan maturity of more than seven to 10 years has completely disappeared,’ Asmar told REFIRE. ‘Therefore, a key driver that triggers a sale-and-leaseback transaction is the ability to secure long-term financing which is today not available in the public or bank markets. Signing a long 15 or 20 year lease allows firms to secure a sustainable source of financing and avoids refinancing or interest risks. It does not come as a surprise that a growing number of Mittelstand (mid-sized) companies are exploring sale-and-leasebacks transactions as a serious alternative source of financing,’ he added.

In Germany, sale-leaseback has been mainly driven by the retail sector, according to Asmar, who cites food retailers Aldi, Lidl, Edeka, RWE, and Metro and DIY retailers such OBI or Hellweg, who have all completed large sale-leaseback divestment programs.

US leads the way

However, Germany still has a long way to go to catch up with the US, where the sale-and-leaseback sector has grown significantly over the past 10 years to become a sizeable component of all major REIT benchmarks and indexes.

In the US, the transaction volume in the net lease sector has grown steadily from $50bn in 2014 to $62bn in 2018, according to CBRE.  To put it in perspective, the real estate volume (across all asset types and classes) in Germany was €60.1bn in 2018, according to CBRE. In the US, there are over 40 publicly-listed REITs exclusively focused on sale-leaseback transactions, including publicly-listed REIT Getty Realty, which specializes in sale-and-leasebacks on C-stores and gas stations. Other REITs such as MGM Growth Properties focus on sale-and-leaseback transactions on casinos.

In Europe, sale-and-leaseback transactions have followed a similar growth pattern over the past 10 years, according to Asmar: ‘The drivers of such transactions are multiple and depend on corporate objectives,’ he said. ‘Some firms have used build-to-suit programs as a way to turbo charge growth by adding a large number of points of sale in record time. Others have used these transactions to refocus on their core business and optimize ratios such as “Return on Assets”’.

In the long-term, there is no reason why the European sale-and-leaseback market should be so different to its US counterpart, according to Asmar. ‘European companies own $4trn of real estate, compared to just $2trn in the US, so there’s a lot of potential for more sale-and-leasebacks. We’d like to grab a significant market share. We typically look for 10 year leases but we can bend the rules and make exceptions if it’s an interesting play.’

Sale-and-leasebacks offer invaluable refinancing tool

For occupiers, the advantage of sale-and-leasebacks is clear: they are an invaluable refinancing tool, plugging the gap between a senior loan and mezzanine lending, allowing companies to pay down third party debt, all under the cosy auspices of a long-term, secure, rental contract.

Others in the industry are surprised that there aren’t more sale-and -leasebacks: ‘I talked to my guys about this and they are surprised that there aren’t more,’ said Yvo Postleb, head of Germany at C&W. ‘From a tenant’s point of view, the market is really favourable for sale-and-leasebacks. We’ve seen a few and are working on a few. You have to ask what is your core business and what do you want to focus on?’ (Confidentiality agreements prevented him from disclosing further details.)

However, some investors are sceptical that sale-and-leasebacks are about to take off in a big way: ‘Sale-and-leasebacks are silent,’ Timo Tschammler, CEO of JLL Germany, who is leaving at the end of September, told REFIRE. ‘Financing is cheap, there’s no crisis. Companies are expanding and liquidity is there. If you sell your building, what are you going to do with the extra liquidity? Also, the leases standard IFRS 16 (which came into force in January 2016) requires leases to be recognised on the balance sheet, which could put some companies off doing sale-and-leasebacks.’

Luoma, however, is not deterred:  ‘It’s true that under the IFRS 16 leasing standard, occupiers have to put rents on their balance sheets, but we have not seen this become a major deterrent to sale-and-leasebacks. Many occupiers are still undertaking sale-and-leasebacks to pay down third party debt and fund growth initiatives so it continues to serve as a very effective tool for those purposes.’