‘Sale and Leaseback’ Now Potentially An Option For SME’s
It’s less than a fortnight old and already 2016 has heralded a number of very upbeat predictions about the prospects of the Northern Ireland commercial property market. And, right on cue, we had the announcement last week that the £54.5 million purchase of Bloom-field Shopping Centre by major investor Ellandi had been completed.
Acquisitive investors in the Northern Ireland market, including Tristan, Chenavari, Rockspring and M&G, have been attracted by the strengthening occupational demand, rising rents and perceived value is given the yield gap between Northern Ireland and Great Britain. They may not realise it – or at least have not fully considered it – but the improved performance of the local commercial property market has created a climate which could present a major opportunity for a number of SMEs across Northern Ireland.
Chance to convert their equity into cash flow
Many SMEs who are owner-occupiers of their premises could now have the chance to convert their equity into cash flow while retaining an interest in their property. This opportunity comes in the form of ‘sale and leaseback’ deals – the sale of an asset that the vendor rents back from the buyer immediately after the sale, thereby raising cash. It’s a market which is not particularly mature in Northern Ireland, but the conditions are now conducive to becoming much more commonplace. It’s a segment of the market which is traditionally seen largely as the reserve of PLCs, but, for a number of reasons, some of Northern Ireland’s SME-led economy now has the chance to take advantage of sale and leasebacks.
One of the main factors is that, in an ever-improving market, investors are less risk-averse. If the underlying asset is of good quality, the location is sustainable and the rent is anchored to the market, then buyers are more likely to take a view on the covenant and be more willing to engage with SMEs. Another reason is the re-emergence of many businesses following a period of consolidation, meaning that conditions are now ripe for many to release capital and re-invest. Whilst debt is cheap, Northern Ireland’s core banking market is still tentative and cash flow lending is still challenging for many of the mainstream Banks.
Benefits to SMEs of engaging in sales and leasebacks
There are a number of significant benefits to SMEs of engaging in sales and leasebacks, the biggest and most obvious one, of course, being that it is a quick and effective method of releasing full value for real estate and improving cash flow. It can also pave the way for reducing expensive debt and facilitating re-investment in the business.
Sale and leaseback allow a business to operate from the same premises whilst avoiding the risks associated with owning property, while the fixed monthly rental payments may make cash flow management a simpler task. The potential tax benefits of sale and leaseback are also evident as they may enable companies to offset rent as an operating expense or avoid any tax implications on an appreciating asset in an improving market.
It would be remiss not to make a note of caution and outline that it also carries potential downsides. Businesses are ultimately giving up ownership of their premises and, while buy-back options can be included, they may lessen the tax benefits. The potential for capital gains liability must also be considered, as must a reduction in flexibility as a business is anchored to a lease term and rent.
Notwithstanding these potential negatives, sale and leaseback provide SMEs with a major opportunity to convert their equity into cash flow while retaining an interest in their property. The potential benefits for both the business and the investor are significant if the deal is structured correctly. The business will receive full value as opposed to utilising a commercial mortgage and being constrained by mainstream Banking loans to value policies.
With private money having a renewed appetite for property investment, our local SME businesses might be surprised at what they could realise for their property assets on a sale and leaseback basis – if the property fundamentals are right.
Declan Flynn is Managing Director of Belfast-based commercial property agency Lisney, which works on behalf of many of Northern Ireland’s most significant investors and developers as well as major retailers and businesses.