Edition 2: The death of the Sale & Leaseback? Not yet by far…
The new lease accounting standard, IFRS 16, is set to significantly change real estate. It will radically impact the accounting treatment of Sale & Leasebacks, meaning there is a limited window of opportunity for occupiers to reap the current benefits of strong demand and favourable accounting treatment.
What is a Sale & Leaseback?
A Sale & Leaseback is a real estate transaction in which an occupier sells its interest in an asset in exchange for a cash receipt and simultaneously signs a lease with the purchaser.
Why are Sale & Leasebacks popular?
Sale & Leasebacks offer multiple benefits for occupiers.
- Under current lease accounting rules, Sale & Leasebacks can be used as an alternative method of financing and importantly are generally structured to achieve ‘off-balance sheet’ treatment. This allows the occupier to free up funds tied to real estate to invest in core business operations.
- Occupiers often carry assets at a low Net Book Value. Selling an asset with the benefit of a lease often results in a significant uplift in value; this is recognised as profit.
- Sale & Leasebacks offer occupiers the opportunity to ‘de-risk’ by selling assets which are not required for operations in the longer term, while retaining occupational security for the duration of the lease.
How will IFRS 16 impact Sale & Leasebacks?
IFRS 16 impacts Sale & Leasebacks in two ways.
Firstly, Sale & Leasebacks will no longer be ‘off-balance sheet’. Under the new standard all leases will come ‘on balance sheet’ as an asset and liability.
Secondly, the accounting profit occupiers can recognise from Sale & Leasebacks will be restricted. Effectively, the new standard restricts this to the uplift in value attributable to the period after lease end only, i.e. the residual value.
With one flick of the pen, the IASB has effectively wiped out two of the most significant benefits to Sale & Leasebacks. It’s not all bad news though…
What does the future hold for Sale & Leasebacks?
IFRS 16 becomes effective in 2018/2019. There is a limited window of opportunity prior to this date for occupiers to benefit not only from the favourable accounting treatment of a Sale & Leaseback but also from the strong investor demand for this product.
There is an estimated £2.5 – £3bn of unspent funds chasing Sale & Leaseback investments.
A significant portion of this cash is actively seeking opportunities offering long-term income (10+ year lease) to an investment grade occupier covenant. These investors view Sale & Leasebacks as a transaction based on an income stream, rather than a real estate asset.
That said, a number of specialist investors have emerged, who in the search for yield are specifically targeting opportunities with shorter lease terms and asset management potential or alternatively sub-investment grade occupier covenants.
The current market therefore offers a unique opportunity for occupiers of all types.
While its demise may be cresting the horizon, the Sale & Leaseback is far from dead!
Hannah Coleman is an Associate Partner in Strategic Consulting EMEA at Cushman & Wakefield.
Hannah specialises in supporting corporate occupiers with IFRS 16 implementation, cost reduction and capital raising.
Our Strategic Consulting experts provide innovative real estate solutions to organisations with specialised requirements. Bringing together experts from finance, property and accounting, we support clients in the areas of Occupier Finance, Business Location & Incentives Advisory, Portfolio & Metro Strategy, Workplace Strategy & Change Management, Occupier Development, Centre of Excellence for Real Estate Analytics.
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