Transactions gaining popularity as they enable companies to free up cash locked in property assets, consultancy says
The number of real-estate sale and leaseback (SLB) transactions by corporate entities is rising in the Gulf region, according to JLL.
Common in more mature markets, SLB transactions occur when an owner sells a real-estate asset and simultaneously leases it back, for a medium- to long-term period. Such transactions can enable companies to release cash locked in real estate to invest back in their core business. It also allows corporates to lighten their balance sheet and improve return on assets, while allowing for a reduction in tax liabilities by using rent as an expense, JLL said.
The rising popularity of SLBs is due to companies generally being more comfortable with long-term lease agreements, while banks grow more cautious on lending. In the past few years JLL has observed these transactions undertaken by school operator GEMS, grocer Azzizah Panda, dairy company Al Safi Danone and retailer Jarir. SLBs can also be applied to other real-estate asset classes, including offices, hotels and healthcare facilities.
According to Gaurav Shivpuri, head of capital markets at JLL MENA, companies that would like to lock-in lower rent payments and free up cash for other purposes can consider SLB transactions, particularly given the current low interest and real-estate capitalisation rates.
“A corporate entity has the flexibility to structure an SLB to suit their preferences including tenure, escalations, breaks and buy back options. However, as the interest rates move up, we expect the capitalisation rates to follow, driving up the rental costs,” he said.