Sale & Leaseback: an increasingly popular formula across European Logistics
In a Sale & Leaseback (SLB) agreement, the owner of a real estate property sells an asset and then leases it back from the buyer in the form of a long-term contract. Companies take advantage of SLBs when they haven’t got enough cash to carry out an investment but they still need the asset itself to operate their business.
In Europe, SLB transactions in the industrial-logistics sector reached €3.4 billion in FY20, an increase of +15% (vs. FY19) whilst total logistics investment onlygrew +4% (vs. FY19)which shows the need for capital investment in the industry, and thus the popularity of this formula.
Logistic companies constantly compete for strategic locations in the hope of optimizing delivery time and reducing costs. Given modern day trends, they also need to integrate an omni-channel pipeline of sales, so e-commerce leading firms tend to invest heavily in order to preserve their market share. It is for this reason precisely that SLB has become a decision to which so many companies turn to.
Apart from the obvious reason to resort to a SLB (obtaining immediate liquidity to invest elsewhere, while still remaining in the asset), there are additional benefits for both Lessee and Lessor:
- 100% of rent payments are tax-deductible.
- A company subject to funding limitations due to prior loan/bond agreements can circumvent these limits with an SLB transaction.
- The transaction removes the asset from the balance sheet as well as any other liability inherent to it.
- The company can invest in its core business which normally present higher returns than real estate investments.
- The new lessor acquires an Asset with stable Cash Flows since day 1.
If we take a look at the market, prices for logistic assets are reaching all-time highs, and historically there has been a positive correlation between property prices and SLB activity. Prime yields for the logistic sector have compressed significantly throughout FY21 and H1 2022, reaching levels of 3.8% in both Madrid and Barcelona (the lowest levels ever recorded). This yield compression and the resilience of prime rents have driven up capital values considerably, with an impressive +28% vs. FY19 in Madrid.
Having seen all this, CG Capital Europe is not surprised by the increasing number of SLB transactions occurring across Europe. The benefits for both seller and investor are countless, and we expect this trend to endure over the coming years.