This article is from the Australian Property Journal archive
SALE and leaseback deals have underpinned a surge in corporate asset sales, with $3.7 billion in transactions recorded as companies took advantage of rising values to shore up their balance sheets.
According to Knight Frank, over the year to June corporate sales accounted for 11.8% of total investment volume, compared to 5.7% over the 12 months to March 2020, prior to the pandemic.
The prominence of sale and leaseback deals implies businesses are not selling their property holdings because they are no longer required, but rather to free up capital for other uses.
Sale and leaseback deals accounted for 61% of deals with corporate sellers over the year to June 2021. This was up from 46% a year earlier, and the highest level since the first quarter of 2013.
There are two principal drivers for the rise in companies selling property holdings over the past year, according to Ben Burston, chief economist of Knight Frank Australia.
“Firstly, it reflects the desire to support corporate balance sheets and rebalance asset holdings amidst the pandemic.
“For some companies, trading conditions over the past year have presented a serious challenge to cash flow and this has motivated the desire to shore up balance sheets via asset sales.
“For other companies, there was no material threat to cash flow but asset sales have been pursued to free up capital to deploy opportunistically as they reassess their business models and reconfigure their operations in the wake of pandemic-related disruption.
“Secondly, companies have also sought to take advantage of historically low yields on many commercial property assets which have resulted in rising values and hence the scope to realise substantial capital gains on long-standing property holdings.”
Industrial assets played a starring role. Telstra’s sale and leaseback of its data centre in Clayton in Melbourne to Centuria Industrial REIT for $416.7 million last year set a record for an individual asset transaction in Australia, while it also divested the Pitt Street Exchange in Sydney to Charter Hall Long WALE REIT for $281.5 million.
Aldi’s disposed of four distribution centres to Charter Hall and Allianz Real Estate for $648 million in June 2020, and another pair to the same buyers for $281.5 million in December.
Qube Holdings’ pending disposal of the Moorebank Logistics Park in Sydney to Logos will add almost $1.7 billion to the overall total.
Meanwhile, Woolworths Holdings sold the David Jones store on Elizabeth Street in the Sydney CBD to Charter Hall for $510 million in December 2020.
Burston said that with the notable exception of the retail sector, property yields have generally continued to drift lower over the past few years consistent with the shift downward in interest rates since mid-2019.
“Yield compression has been particularly pronounced in the industrial sector, with demand for logistics assets boosted by the acceleration of growth in e-commerce and the trend towards online shopping.
“The growth of the sector has spurred the development of larger and more sophisticated buildings with long leased income streams and yields for these types of assets are now moving below 4.0% in Sydney and Melbourne.
“Companies have taken advantage of this environment to sell (and often leaseback) assets, with the industrial and logistics sector accounting for 48% of deals with a corporate seller over the year to June 2021.”
Looking ahead, the economic recovery currently underway, which to date has been stronger than anticipated, should continue to ease the pressure on corporate balance sheets.
“At one level this will reduce the impetus for companies to monetise their property assets. Indeed, the share of deals with a corporate seller has moderated a little from its recent peak of 14.9% of total investment volume recorded over the year to March 2021, although it remains high by historical standards,” Burston said.
He said intense competition for property assets, including from major global investors with a low cost of capital and commensurately low target returns, will continue to drive strong pricing.
“This will be particularly evident in industrial and logistics assets and alternative assets such as data centres, which will continue to motivate corporate property holders to take advantage through asset sales.”
