Real Estate Sector Comment – October 2016


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Sale and leaseback analysis

At Clearwater International we estimate that less than half of European companies own their real estate. While interest rates remain at a historical low, a growing number of investors are beginning to wonder whether the timing would be right to buy back the real estate assets they operate. Meanwhile, a large portion of investors still prefer to allocate their cash to development projects or acquisitions which provide higher returns than real estate.

Despite potential tax implications and an immediate reduction in EBITDA, sale & leaseback (where an asset is sold and leased back over a long period) transactions offer numerous advantages for shareholders and their companies including:

  • Generating capital to invest in development projects, external growth or to reduce debt, whilst still being able to use the asset over the long term;
  • Creating immediate value for shareholders by ‘unlocking’ real estate assets’ value;
  • Reducing corporate tax as rent payments are deducted from tax basis;
  • Simplifying the company’s business model (and therefore valuation) by turning it into a pure operating company; and
  • Helping to limit risks associated with owning real estate such as cyclical market variations.

We have recently seen a rally in valuations mainly due to low interest rates, with capitalisation rates going below 5% for premium assets. While institutional investors and real estate investment trusts (REITs) pay a great deal of attention to key financial ratios such as rent / revenues or EBITDA margin, the intrinsic quality of the asset (location, historical capex spending, etc.) and the financial solidity of the future lessee remain the two key considerations from a buy side point of view.

At Clearwater International, we have a significant track-record in sale & leaseback transactions, advising clients across various sectors. We have also worked on numerous transactions with an important real estate component:

  • Retail: Vivarte for its HQ building and a portfolio of c.90 stores
  • Leisure: Odalys for a portfolio of camping sites
  • Industrials: Elis for a portfolio of 17 industrial sites
  • Healthcare: Capio and Medica for portfolios of clinics