Sale and leaseback deals gain traction in GCC

The number of real estate sale and leaseback (SLB) transactions undertaken by corporate entities is rising in the GCC and these types of transactions will form a significant part of the institutional sale volume in the coming years, according to a report by JLL, the real estate investment and advisory firm.

The practice involves the sale of an owner-occupied corporate real estate asset, which is simultaneously leased back for a medium- to long-term period by the seller.

Opportune time

“Given the low interest rate cycle we are in and the fact that real estate capitalisation rates are at the lowest they have been in the past decade, we believe it to be an opportune time for entities that would like to lock in lower rent payments, to consider such transactions and free up cash to invest in their core business,” said Gaurav Shivpuri, Head of Capital Markets at JLL Middle East and North Africa.

“Additionally, in instances in which investors are chasing income-producing real estate assets, a corporate entity has the flexibility to structure an SLB to suit their preferences. However, as the interest rates move up, we expect the capitalisation rates to follow, driving up the rental costs.”

SLBs enable corporates to release cash locked in illiquid real estate to invest back in their core business where the returns are superior to property. Additionally, it allows for the lightening of the balance sheet and improvement of the return on assets, as well as allowing for reduction of tax liability by using rent as an expense.

Driving demand

In the past few years, such transactions have been undertaken by school operator Gems, grocer Azizia Panda, dairy company Al Safi Danone and retailer Jarir. At the same time, this can be applied to other real estate asset classes, including offices, hotels and health care facilities.

According to JLL, the growth in these types of transactions is due to corporate entities becoming more comfortable with long-term lease agreements and lending institutions becoming more cautious on name lending. At the same time, there is also significant interest for such assets within the investor community, thus driving demand for this product.

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