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PODCAST: Why COVID-19 is accelerating corporate sale-and-leaseback activity

Global uncertainty is driving companies to release capital from office and logistics assets

June 19, 2020

Corporate finance heads are increasingly turning to their existing real estate as a source of liquidity in the uncertain economic environment.

Sale-and-leaseback deals – where companies sell their real estate, then lease it back from the new owner – have been on the rise in recent years. But there has been a greater focus on them in recent months as the global pandemic sent companies hunting for strategies that boost equity.

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“The economic uncertainty is forcing businesses to think about flexibility and agility,” says Regina Lim, Head of Capital Markets Research, JLL Asia Pacific. “The benefits of unlocking liquidity through sale and leasebacks is 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.”

Earlier this month, a portfolio of Aldi distribution centres in Australia was acquired by a joint venture between Charter Hall and insurance giant Allianz in a sale-and-leaseback deal worth A$648 million.

In the last four years, there has been a 50 percent increase in sale and leaseback deals in Asia Pacific, with growth three times faster than the overall investment volumes in the region, according to JLL data. There was US$12 billion of such deals in 2019 alone.  

Rethinking and reshaping

Large supermarket and retail chains with industrial property on their books are top among those considering sale and leaseback strategies as they reassess strategies.

“COVID-19 has been like a reset, forcing a lot of companies to re-examine the way they deploy their capital to get the best return,“ Lim says.“While such divestment decisions have been made in the past, they will be accelerated by the current COVID-19 crisis.”

With the onset of the COVID-19 and throughout the first stages of recovery, many investors are deploying more defensive strategies, looking to lower leverage and diversification across geographies and asset classes and stable, income-generating assets.

With approximately US$40 billion in dry powder capital ready to be deployed into Asia Pacific real estate, sale and leaseback assets, with long leases and rent escalations, are positioned well for acquisition as investors think about re-entry, says JLL.

“While cautious, our conversations with investors indicate that some are looking to increase their target allocations to take advantage of any dislocation,” says Stuart Crow, CEO, Capital Markets, Asia Pacific, JLL. “Increasingly, these market re-entry conversations have pivoted towards corporate sale and leaseback opportunities, a major theme already emerging in the broader global investment and occupier markets.”

In the U.S, where the likes of Bed Bath & Beyond and Macy’s sold their real estate prior to the pandemic, department store chain JCPenney, having filed for Chapter 11, is currently spinning out its portfolio 850 properties into a separately owned real estate investment trust.

Disposals of corporate real estate in Europe last year rose 33 percent to €23.1 billion, across more than 460 transactions, according to JLL data with a recent example in May this year with Aviva Investors’ long income real estate fund’s investment of £107 million in UK logistics warehouses sold by clothing retailer Next and leased it back to them.

A developing market

While sale and leaseback strategies are a relatively common strategy across Europe and the United States, the appetite has been lagging in Asia Pacific until recently.

“Traditionally Asian businesses have preferred to own a property over leasing it but this is gradually changing as asset prices continue to increase,“ says Lim. “We're seeing a lot more activity from niche players like family offices and private equity funds who are under invested in Asia Pacific real estate and value stable income generating assets.“

“That trend will continue through and beyond COVID-19,” she says.