December  2008 VOL. 2

Investment Notes

While the global credit crunch has dramatically decreased commercial property transaction volumes during the first six months of 2008, a slower economy and increased costs of capital have created a surge of corporate sale-leasebacks, according to Jones Lang LaSalle’s H12008 Global Real Estate Capital Report.
 
The trend for corporate sale/leasebacks has been developing over the past few years. In the first six months of 2005, sale-leasebacks were some $10.4 billion of the transaction volume internationally, rising to $20.7 billion in 2006’s first half and $30.7 billion for the same period in 2007.

"With global economic growth forecast to slow further in 2009 and continued weakness in financial markets, the rise in corporate sale activity will continue and should reach $34 billion by year-end,” says Steve Collins, managing director of Jones Lang LaSalle’s International Capital Group. “We’ve seen a dramatic shift in sellers that occurred as a result of the credit crunch and corporations’ need to access affordable capital outside the debt markets. A large percentage of the offerings we’re working on are corporate sale-leasebacks and they’re grabbing the attention of global investment capital across the globe.”
 
The majority of the corporate activity occurred in Europe and Asia Pacific, with 56 percent of corporate sales taking place in the EuroZone and about a third in the Asia Pacific region. The Americas counted for 9 percent, with $1.1 billion sold in the U.S. and $0.9 billion in Canada.

“We predicted that we’d see corporates becoming a larger slice of the property sales pie this year and that’s proven true,” adds Kenneth Rudy, Jones Lang LaSalle Capital Markets President and COO.  “Corporate real estate is more in focus that ever before with finance and treasury executives. The own vs. lease question is being asked with increasing frequency, especially for capital raising as the credit crisis has turned corporate liquidity upside down.”
 
Rudy notes that sale-leasebacks are seen as an attractive asset today for investors since they can obtain debt more easily supported by the credit of the tenant and the lack of lease-up risks. And sale-leasebacks offer corporations the opportunity to not only redeploy capital from their owned real estate, but also to shift future disposition risk and enhance occupancy flexibility over time.
 
Jones Lang LaSalle says the most active investors in the sale-leaseback market today are those who do not require as much leverage and who enjoy good relationships with lenders and/or have strong cash flow from other assets. In addition, these investors tend to be long-term holders and see their real estate investments as an alternative to corporate bonds, while maintaining a hedge against inflation and an upside equity kicker.
 
In the coming years, there will be more mandates in the U.S. and for U.S. multi-national companies for disposition of surplus real estate. This portfolio rationalization comes against the backdrop of general nervousness about the economy, as well as from M&A activity.
 
“The pressure to cut additional costs will be enormous,” Rudy explains. “With real estate capital still representing a relatively attractive form of capital compared to general unsecured corporate debt, corporate sale-leasebacks and dispositions will assume an increased slice of the investment pie for the remainder of 2008 and into 2009.”