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Sale and Leaseback Transactions in the Retail Sector

May 29, 2020

An article by Paisley Sherwood

According to  ‘Real Estate Deal Negotiation: A How-to Guide’, strategising is key to securing a beneficial deal.

In the face of COVID-19 and in search of financial aid alternatives, retailers across the globe have been considering sale and leaseback transactions. In the UK in particular, major retailers including the likes of Ted Baker and Next have already pursued such activity to boost cash flow. Ted Baker has sold its King’s Cross headquarters to British Airways Pension Trustees for £78.75 million. Next is in the process of selling its Leicester headquarters along with three of its warehouses for £100 million. Tom Edson, head of capital markets at Colliers International explains how strong retailers are amongst those who benefit most from such transactions, especially if they have well-located warehouses and strategically placed headquarters.

An FXCM article on popular American retailers pegs Walmart as the largest retailer in the world, earning more than twice the amount of annual sales revenue than global giant Amazon. Walmart’s 41,990-square-foot building located in Sumter, South Carolina will be turned over to an unnamed investor based in Florida in a 13-year lease worth $13.9 million (roughly £11.3 million). With their sales numbers soaring by almost 20% in March 2020, it appears that they’re on the right track. 

While sale and leaseback transactions can be beneficial helping to raise capital without incurring debt and offering a tax advantage compared to debt financing, they don’t come without their drawbacks. For retailers who have relatively weak financial positions, bargaining can become challenging and may cause them to pay too much to lease the space back if their fiscal situation worsens. Furthermore, the added transaction costs including deed taxes, new financing obligations, and negotiation outlays need to be considered before the sale. Finally, British buyers and investors may not be willing to make risky investments even though retailers are willing to sell their assets. On the other hand, other options for retailers under threat exist, including the subdivision or outright sale of their property. In the near future, Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, speculates that there will be an increase in the number of sale and leaseback transactions as rent holidays for retailers come to an end over the course of the summer.

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