Paul Lewis, EMEA head of corp capital markets, CBRE
This year is expected by many to signal the end of the sale-and-leaseback transaction.
After all, with the introduction of IFRS 16 next year, it would no longer be the pure off-balance sheet financing tool it once was and all companies that lease real estate would see their balance sheet liabilities increase.
However, there are good reasons to believe that the effects of these accounting regulations might, paradoxically, increase the volume of corporate real estate sales. First, one side effect of the changes is that rent will no longer be deducted when calculating EBITDA. This opens up an array of opportunities for shareholders to dust off the now out-of-favour ‘opco-propco’ structure to create additional value from companies with big real estate asset holdings.
Secondly, sale-and-leasebacks will still represent a partial off-balance sheet financing. Unlike conventional debt finance, only the present value of the rental payments will be counted as a liability and usually the discount rate used will be significantly higher than the property yield. The balance sheet impact could be as low as half the amount raised, so still represents an attractive option against other forms of finance.
Finally, the introduction of the regulations has been expected for so long that bankers have had time to consider ways of structuring debt covenants to exclude the effect of the new regulations. Indeed, the Loan Market Association has now incorporated wording into its loan documents to specifically exclude the effect of IFRS 16.
Certainly some firms will be still be affected, but the effect is unlikely to be as significant as many in the industry thought. With demand for long income collateralised on real estate continuing to increase, don’t expect the demise of the sale-and-leaseback transaction just yet.