New Marketing
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By Fernando
Fernández de Ávila,
SIOR, MRICS
“Sale & leaseback” transactions have been at the fore
front of the market in recent years. They have been on the
increase ever since they came into the media spotlight at the
end of 2007, when the British fund Pearl purchased Banco
Santander’s branches. Now sales & leaseback transactions
currently make up the majority of the large transactions in
the investment real estate market.
These transactions enable buyers to purchase an income
producing property with longterm lease contracts, which are
normally located in prime locations with AAA tenants. The
first transactions completed were for bank branches. These
were financial transactions rather than purely real estate
transactions, because although the buyers acquired retail
units (bank branches), they were actually buying single
tenant contracts with a long compulsory fixed term, with
rents that have not yet fallen to current levels and with annual
rent reviews which normally increase. In other words, cash
flow is continuous and is not affected by market volatility
in the current economic climate. Returns on these types of
investments are low, with internal rate of returns (IRR) and
risk premiums, which are similar in many cases to credit
default swaps from bank bonds for those who acquired assets
(Pearl purchased the branches at around 4. 7 percent). Banco
Santander was successful because it sold its assets at a yield
that was below the cost of debt, which was shown a few
months later when it issued corporate bonds at five percent.
As time went by and the market deteriorated, these trans
actions offered higher yields, like when the German fund
RREEF purchased BBVA’s branches at yields of around
seven percent. Logically, these transactions require a lot of
financial muscle, so the list of potential buyers was limited
to different foreign fund managers with traditional profiles
(pension and insurance funds, etc.). These foreign fund man
agers had experience in these types of transactions and had
enough equity to purchase the assets, which in many cases
amounted to billions of euros. The banks selling these assets
offered financing to buyers, but with a Loan to Value ratio,
which meant that the funds had to invest a lot of capital from
their own funds. Another common characteristic of these
transactions is that they were for banks listed on the IBEX
Stock Exchange, which were owned by blue chip companies.
This provided an additional guarantee to buyers.
