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Hidden values in brick and mortar.

Byline: By Simon Harland

The hot market for property has seen businesses rushing to cash in the value of their buildings in sale and leaseback deals. DTZ's Simon Harland says it makes sense in the current market, but it does have drawbacks.

With more owner-occupiers changing their attitude towards freehold property, sale and leasebacks are playing an increasingly important role in the property investment market.

Historically, property as an asset base has been undervalued, but recent low interest rates together with the high demand for investment stock has pushed up the value of freeholds across the region significantly.

As a result businesses are becoming far more aware of the massive potential lying within their properties and are looking to release this to boost the bottom line or provide the investment capital needed to fund their next stage of growth.

A more traditional route for businesses wanting to raise capital has been to borrow against their property asset. Banks will lend around 70% of the vacant possession value whilst a sale and leaseback structure can realise 100% of the investment value, hence releasing what could be double the amount of cash into the business.

Businesses can now access a range of financial solutions for ownership that allow them to structure corporate assets more flexibly and to effectively strike a balance between maximising up-front proceeds and minimising future rental uplifts.

One consideration is that this form of capital raising often means the occupier has to sacrifice the flexibility provided by a freehold and be governed by the terms of a 15, 20 or 25-year lease.

These long lease lengths and the threat of rising rents can be unattractive to businesses, especially those operating in fast moving sectors where there is a degree of instability.

Furthermore, changes to International Accounting Standards (IAS) which apply to all publicly-listed European companies since January 1 2005, mean that finance leases must be accounted for on the company's balance sheet.

Shorter, more flexible leases may allow them to be accounted for as an operational lease, ensuring that the asset does not have to be included on the balance sheet.

The investment market is becoming more sophisticated, and structured sale and leaseback opportunities are becoming more popular with both businesses looking to release poor performing capital for reinvestment, and investors with an appetite for investment opportunities.

This has lead to an increasing number of transactions featuring shorter term leases and rolling break options that allow businesses to strike a balance between maximising the value of the asset and keeping a degree of the flexibility they enjoyed with the freehold.

DTZ was recently involved in the sale and leaseback of a 570,000sqft distribution warehouse on behalf of Somerfield plc. Somerfield was able to construct a bespoke unit built to its exact specification, rather than a generic developer specification. The supermarket group then used its covenant strength and sold the property before leasing it back releasing a significant development profit over their book cost.

Whether a business chooses a more complex bespoke solution or a more traditional approach, there is still strong investor appetite for sale and leaseback opportunities.

Here in the North-East, DTZ has structured and transacted pounds 65m of sale and leaseback deals in the last five years for clients including Hill & Smith Group plc, Watson Burton LLP, QSP and Tenon Group plc. In the next month, we will be bringing two more sale and leaseback opportunities on to the market, which should total around pounds 6.2m.

Against the backdrop of investors seeking to plough unprecedented amounts into the region's property market there has never been a better time for businesses to realise the value of their property assets through a tailored sale and leaseback.

Simon Harland is an associated director of investment at property agent DTZ in Newcastle.
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Copyright 2006 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Business
Publication:The Journal (Newcastle, England)
Date:Feb 8, 2006
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