These options, according to JLL’s entitled Raising capital from corporate real estate, include:
- Sale and leaseback, in which properties are sold to landlords in return for the company taking an occupational lease.
- Strip income, where an investor pays a lump sum upfront to acquire the rental income derived from a long-term lease, with the property reverting to the tenant when the lease expires.
- Credit tenant leases, which are similar to strip income. Credit tenant leases are sized and priced based on the tenant’s credit rating, the lease structure and rental profile. The rental payments are typically securitised and distributed to credit investors in bond format, offering investor diversification and increased liquidity.
The report’s authors, JLL’s Nick Compton, Michael Evans and Owen King, explain:
“Sale and leasebacks are the most commonly utilised of these options – in part because of the relatively low level of complexity involved and strong market appetite for these sorts of disposals. For UK pension funds and annuity investors in particular, long term indexed sale and leasebacks are a significant source of annuity-compliant investments.
“Recent years have also seen the launch of a number of ‘net lease’ funds specifically targeting sale and leaseback transactions. Alternatively, some firms have opted for property pension fund partnerships, where proceeds from the real estate are used to reduce a deficit in a company’s pension fund.
“This places the property into a partnership vehicle that both the company and its pension fund have a stake in. A lease is then set up between the company and the partnership, with the pension fund’s share being used to pay down the deficit. Investors in corporate real estate are increasingly showing an appetite for collaborating with occupiers during disposals.
“This can take the form of acquiring properties that are vacant or on short leases and sharing the upside created when the occupier commits to a longer lease post-acquisition. Some investors are also collaborating in the procurement of new facilities via direct forward funding. Moreover, the growth of more specialised landlords is providing a viable route to monetisation of more niche property types, including manufacturing facilities, laboratories and datacentres.”
The outlook for 2019
2019 volumes are likely to be similar to 2018, according to JLL, although the global brokerage firm expects some impact from the new lease accounting standards and the consequent loss of potential ‘off balance sheet’ treatment.
The report’s, JLL’s Nick Compton, Michael Evans and Owen King, added:
“The new accounting standards may prompt a move towards greater ownership since leasing now looks more like ownership – though firms will still need to consider how owned properties are funded. We may also see an increase in the use of more structured leasing products given the cost of capital for all forms of leasing should now be much more transparent.
“Corporates will, therefore, be drawn to lease structures that offer the lowest costs of capital. Whilst corporates are currently focused on implementing the new standards, we expect the levels of monetisation to continue to be driven primarily by business performance, sector conditions and the wider economic outlook, as well as the growth of specialist landlords.”