Sale and leaseback transactions gaining popularity in the Middle East

An increasing number of large companies in the GCC are turning to property sale and leaseback deals to free up cash for their businesses, according to JLL.

The consultancy points to a range of sale and leaseback deals in the region in recent years, including school properties sold by Gems Education, supermarkets by the grocer Azizia Panda and bookstores by the retailer Jarir.

Sale and leasebacks involve companies selling buildings to investors to generate cash, but then taking a long leasehold on the properties to make sure they can continue to use them at a fixed cost for as long as they need.

“From a western perspective, these transactions are very common,” said Gaurav Shivpuri, JLL Mena’s head of capital markets. “They’ve been done for many years – decades, even.”

He said attachment to individual pieces of real estate tends to be much lower in more mature markets.

“Here there are many companies that are still privately owned, where the owner or the principal has a much stronger attachment to real estate.”

He explained that there are historical reasons for this. In the past, legal frameworks were not as strong and lease agreements tended to be much shorter, so there was a tendency for lessees to worry about big increases in rents or being asked to vacate a building once a lease expired.

“Investment in real estate was often seen as an alternative means to protect capital,” Mr Shivpuri said.

However, he said that heightened levels of investor interest meant that more deals were on the cards.

He said that this had initially come from asset managers, who like them because they do not involve a lot of management. The former owner tends to continue running the building themselves, and the returns are healthy – especially as the assets tend to generate higher returns in the Middle East than in other parts of the world.

For instance, the same global occupier would attract a yield of 7 to 8 per cent in Dubai, compared to 4 to 5 per cent in London.

Mr Shivpuri said that investors could make returns of about 10 per cent when capital appreciation was factored in, which means the sector has attracted interest from a broader group of purchasers such as institutional investors, regional sovereign wealth funds and private family groups, who appreciate the income-generating aspects.

For the companies selling, sale and leasebacks let them put their cash to better use.

Gems Education sold two school campuses in Dubai to asset managers in November 2013 – the first to Pinebridge Investments and the second to Emirates Reit. After the announcement of the Emirates Reit sale, Gems Education’s chief financial officer Nicholas Guest said it would “help fund our development and expansion plans within the UAE education sector”.

Mr Shivpuri said that for fast-growing companies, buildings are just “a means to an end, not an end in itself.”

“You could earn 2 to 2.5 times what you would otherwise be able to achieve if you were to continue to own real estate.”

Yet sale and leasebacks have been financially disastrous for other companies – particularly if they already carried high levels of bank debt.

In the United Kingdom, a number of companies including the private health care firm Southern Cross found themselves unable to pay the higher annual rent bills after selling their properties in a push for growth.

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