Sale and leaseback has leapt from the business and commercial property sections of newspapers onto the front pages, courtesy of the ongoing Southern Cross story. The financial plight of the care home company, which houses 31,000 elderly clients, is a stark reminder of what can go wrong with this strategy that is regularly employed in the commercial property sector.
As recently as 2004, the sale and leaseback market represented just £6.2bn worth of transactions across Europe. By 2007, against a backdrop of rising property prices, it had swollen to a peak of a £41.4bn market, according to CB Richard Ellis, worldwide commercial property and real estate services adviser.
During this period, Southern Cross, advised by private equity firm Blackstone, had arranged to sell and leaseback its commercial property portfolio, agreeing annual rent rises of 2.5%, irrespective of fluctuations in the commercial property market. Then, in 2007, HSBC switched from owner of its 8 Canada Square headquarters to tenant, selling the Canary Wharf tower for a record-breaking £1bn to property company Metrovacesa.
In 2008, the credit crunch barged into the world’s economies, throwing many of the sale and leaseback agreements into a commercial property puddle of uncertainty.
While HSBC went on to buy back its headquarters from its Spanish landlord, at a £200m profit, Southern Cross had its local authority funding cut, which led to falling revenues, precipitating its current state of near-collapse.
Tesco has utilised the strategy to better effect, embarking on ventures with commercial property companies such as British Land. These deals have enabled the supermarket giant to expand into European territories, while retaining some control over how much rents can be increased.
What of the future? From 2013, changes in accounting laws are expected. These will require businesses to declare leasing on the balance sheet, which may reduce the appeal. For now, the Southern Cross story is set to continue. Blackstone is reportedly interested in acquiring some of its debt and is on a shortlist with three other private equity groups. A decision will be made later this month.
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