Sale-and-leasback as a British real estate model
Tipping, Malvern & Richard K. Bullard
Many established trading companies have had considerable capital value locked into their operational properties. These properties have been identified as producing lower returns on invested capital than core business activities. Consequently, there has been a growing trend for the splitting of operational property from core business activity. In the United Kingdom, the hiving-off of operational property has most commonly taken the form of the sale-andleaseback model. This paper reviews the existing literature and some past transactions in order to identify the motivations of both operational businesses and property investors in adopting the model. Some transaction case studies are also highlighted. Accounting considerations had been a motive behind this trend. Recent reforms to accounting standards have offset that impetus. However, taxation considerations and the desire to release capital from real estate have continued to drive the model. The model has become increasingly popular in the United Kingdom during the past two decades. Originally the domain of those companies with especially strong covenants, it has more recently become much more widespread. The model has been a property strategy much favoured by blue chipp trading companies, including the principal British retail banks. More recently, high demand from investors has resulted in their acceptance of sale-and-leaseback transactions by trading companies with much weaker covenants. Some of these weaker covenants have since failed, leaving investors with investment properties diminished in value. This paper examines recent trends and seeks to identify how the sale-and-leaseback model may develop in the United Kingdom. Furthermore, the application of the model in the United Kingdom may give some insight into its application in other parts of the world, where it is either gaining further acceptance or may have greater potential application.
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