Sale & Leaseback – Bringing More Value to Commercial Real Estate

Companies can use sale and leaseback models to survive in trying times, while facilitating growth during a stable period. Investors can also use the same model to reap benefits.

Sep 11, 2020 3 min read
Strata
Photo by Leohoho on Unsplash

Real estate, be it office spaces, warehouses, or industrial parks, are vital to the functioning of a company. Depending on the nature and size of the business, companies might even own said spaces.

In terms of commercial real estate, these assets are the most profitable to own as well. But what happens when the market or the social situation becomes unprecedented and you find yourself short on capital but own a great piece of real estate? Is there a way where your valuable commercial real estate can come to your aid? The answer is yes, and it lies in the concept of sale & leaseback.

The key to understanding sale & leaseback lies in the name itself. As opposed to selling an asset and walking away, businesses sell their properties but continue using the asset by paying rent.

Thus, the cash tied up in the asset is released while the business can continue to function without any disruption.

The scenarios in which such an option can be utilized are numerous. In fact, we find ourselves in one such scenario right now. Amid global uncertainty, companies are increasingly considering the prospect of releasing capital from office, industrial, and logistics assets and using the cash for growth, settling debts, or even just to survive.

What is in it for businesses

According to Regina Lim, Head of Capital Markets Research, JLL Asia Pacific, “The benefits of unlocking liquidity through sale and leasebacks are even more obvious. Owners can use the extra capital to pay down debt, reduce interest expense, or reinvest to drive the next stage of growth.”

  1. An alternative to loans - With banks struggling with high NPAs, corporate loans are getting expensive and hard to come by. For businesses, selling a CRE asset can be easier, and turn out to be more cost-effective than taking a loan.
  2. Getting rid of debt - If a company feels it is stifled by debt, opting for a sale & leaseback can give it the money needed to clear its debts and grow.
  3. Freeing up capital from auxiliary assets -  Companies can decide that assets they own are no longer as critical as they once were and the money locked-in can be better used elsewhere.

What is in it for investors

Investment in a sale and leaseback asset has the following benefits -

  1. Longer lease and lock-in periods - During a sale and leaseback, companies generally opt for long lease and lock-in periods. The reason is simple. Companies just want to free up capital from fixed assets. There’s mostly no need to shift the base of operations. This means a stable investment and safe returns.
  2. Improve/diversify tenancy - Some deals involve the sale of, revamp, and leaseback of properties. In this mode, the number of tenants can increase in a commercial space, and based on the terms of investment, you can have a healthy mix of tenants in different sectors giving you stable returns.
  3. Acquiring assets at attractive prices -  Companies engaging in sale and leaseback need the capital as soon as possible and will often agree to sell at below-market prices to expedite the sale process. For investors, this is a great opportunity to acquire valuable assets that can be sold at a profit later.

Sale and leaseback is clearly a win-win situation for businesses and investors. While common in the US, the concept is only picking up now in India due to the current market condition.

Deals in sale and leaseback accounted for 8.6% of Asia Pacific commercial real estate investment in the first half of 2020. This is in stark contrast to the 4.3% recorded for the full year of 2018.

85% of total sale and leaseback turnovers between 2018 and 2020 YTD have involved office and industrial assets.

Strata is working closely with large corporates who are interested in sale & leaseback options and will offer them to investors on our fractional investment platform.

For more information on how we work, please visit www.strataprop.com