The captivating sale-leaseback formula

Monday, 18 november 2019 | Redacción CEU

The circumstances that each company experiences are unique. That is why all the firms have their own and original way of dealing with them. This means that companies have to sharpen their ingenuity and resort to options that are not widespread, but nonetheless effective. One of them is the sale-leaseback formula (SLB) which is a strategy designed in order to achieve liquidity without losing the right of use over the good that has been sold. What exactly does this operation consist of? What are its advantages and disadvantages? What sectors bet on it?

Sale-leaseback transactions are a special funding alternative. They are operations in which the owner of one or more assets (movable or immovable goods) transfers them to a third party -as a general rule to a financial company-. The former owners usually have the goal of recovering them later. The particularity of this option lies in the fact that, right after the selling, the owner signs a financial lease contract, becoming the lessee of the good or goods while the buyer becomes the lessor. Therefore, this is a strategy in which there is a paradox: the owner of the good sells the good without the intention of getting rid of it, but rather with the firm purpose of maintaining it. Why do owners sell them then? Generally, they do so because they are facing a period of economic difficulty and uncertainty and need to obtain liquidity immediately. Other times, because it is part of their financial strategy.

A formula that is taking the retail world by storm

Although it can be used for many types of assets, these operations are usually concentrated on goods within sectors such as banking, manufacturing, public administration or the real estate world. In relation to the latter, it is used for immovable goods like hotels, industrial buildings, business premises, etc. However, this formula is growing exponentially in a specific sector: the retail world. According to the data published by Savills Aguirre Newman, in Europe, sale-leaseback transactions have accounted for 11.1% of the total volume of retail investment in the first three quarters of 2019. In fact, after the 11.3% that was recorded in 2007, this is the highest percentage ever reached. This is a strong trend, since it represents 30% more than the average of the last ten years in the same period of time.

The real estate consultant points out that SLB operations amounted to 1.7 billion euros in this sector in these last quarters. In fact, the volume reached until September is higher than the total that was registered in 2018. Likewise, Savills Aguirre Newman expects more transactions of this type to continue to occur in the year ahead. Within the retail world, the segment that is resorting to this formula most is that of supermarkets. With regard to geographical distribution, most transactions were concentrated in the United Kingdom (39%), France (34%), Spain (13%) and Poland (8%).

From the consultancy firm, they explain that this financial strategy enables those who bet on it to obtain a capital from their real estate assets in order to reinvest it in their retail activity. For their part, investors manage to obtain real estate assets and invest a large amount of money that brings about long-term revenue streams.

Opportunities and risks

The sale-leaseback alternative is an interesting formula when it comes to meeting immediate liquidity needs, but, as in any financial operation, each company or individual must consider the opportunities and risks of this strategy:

SLB’s advantages

It is a fast and effective funding tool which is really useful for short-term needs.
The capital which is obtained from unprofitable assets can be invested in assets that are profitable.
It is a way of obtaining extra liquidity in a business when there is no access to banking or financial funding because there is already a high level of leverage.
It serves as a strategy to combat a scenario where there is a credit restriction.
The sold goods cannot be seized when they are leased.
The former owners, which are now renters, can continue enjoying the use of the good.
Once the lease agreement is over, sometimes, lessees have the possibility of buying back the property regaining thus the ownership.
There may be a revaluation of the property, since the contracts are signed for the long term.

SLB’s disadvantages

Investors usually buy these assets at a lower price than they have in the market.
There is a loss of capital, as owners become tenants and pay periodic rental fees. In some way, former owners pay "interests" that have already paid before.
In some cases, they lose the right to repurchase the goods.
They have less control over the property. For example, they have limits on infrastructure modification.
They lose a real estate asset.
When they sell their assets, they may miss the opportunity to opt for other financing alternatives.

The CEU IAM Business School offers different programs (in-person and online modalities) which are focused on the training of professionals who are already working on or starting to work on the real estate sector. According to your profile and needs, our business school offers the possibility of choosing different training courses: a Focused Program on Planning, Urban Management and Licenses, a Focused Program on Analysis and Valuation of Real Estate Assets, an Advanced Program in New Management of Real Estate Business (online and in-person modality), an Advanced Certification Program in Real Estate Credit Counseling, a Focused Certification Program in Information and Commercialization of Real Estate Credits and a Master’s Degree in Urban Planning and Development. Ask for further information with absolutely no obligation on your part!