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Global economic stress to drive increased sale and leaseback activity

Despite a slowdown in commercial real estate (CRE) markets, a tough macroeconomic backdrop and tighter lending conditions are set to make property an increasingly attractive means to raise capital, leading to opportunities for corporates and investors alike, according to new research from Colliers.

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According to the report, Leveraging corporate finance to unlock real estate capital, with uncertainty continuing to roil global markets and interest rates likely to stay elevated, price corrections in real estate are likely to persist well into second half of 2023. Nonetheless, as investor appetite for real assets remains strong, real estate offers clear potential for companies to raise capital on favourable terms.

The report outlines a range of options for companies looking to use real estate as a route to access capital, including sale and leaseback transactions, in which a company sells a building it is constructing, or owns and occupies, to an investor and subsequently leases the building for a defined period, are expected to see particularly robust growth due to the benefits they offer both sides.

“Sale and leasebacks give the corporate a means to unlock cash that can fund strategic business initiatives while continuing to enjoy control and access to the asset,” says Robert Campkin, Managing Director, Head of Corporate Capital Solution in EMEA Occupier Services,

According to the report, while activity is likely to remain subdued in the near term, real estate will remain sought after by investors - particularly assets that are mission critical in nature, and/or tie into the growing focus on sustainability. “Investors are increasingly aware of the need to build portfolios that will retain value as regulations change and many are also working towards their own environmental targets,” notes Campkin. “Corporates looking to monetise sustainable real estate assets are likely to enjoy the widest range of options, and the most favourable terms.”

Among the report’s key findings are:
A ‘turning point’ likely next year: A long-awaited correction will unfold throughout most of 2023 across different real estate markets at various speeds, depending on local conditions and interest rate developments. However, with some markets, like the UK, already seeing substantial yield moves, investment activity is expected to bottom out and recover by the end of 2023.

Corporate cash needs will bring assets to market: A wide range of real estate investment activity is expected to emerge around companies needing a cash injection or looking for partnerships to develop or upgrade assets, primarily via sale and leaseback arrangements. Assets such as industrial and logistics, and/or sustainability components are expected to generate the most interest.

Continued real estate M&A activity: Large funds have been actively pursuing M&A as a means to access long income real estate assets and this trend is likely to continue. More investors are anticipated to utilise M&A to enter specialised sectors and gain the knowledge and skills necessary to operate in them efficiently and profitably.

Even more emphasis on sustainability: Colliers has noticed an uptick in sustainability information being demanded by investors and lenders before assets are acquired or financed - as well as a focus on occupier ESG credentials, particularly in transactions that involve long lease commitments. These considerations will soon accompany any effort to raise capital via real estate assets as a matter of course.

A need for expertise: The complexity and balance sheet implications of real-estate linked funding mechanisms mean transactions like sale and leasebacks and alternative financing structures need to be approached and structured carefully to ensure they remain financially viable and beneficial for both seller and buyer in an environment of heightened uncertainty. Colliers recommends companies considering participating in such deals consult specialists with a proven track record of advising and executing transactions of similar scope.