Real Estate Investor Magazine South Africa October 2014 | Page 44

INSIGHTS

COMMERCIAL

Structured

Sale And Leaseback

Transactions
Growing demand in commercial
and industrial sectors

T

Seeff chairman, Samuel Seeff (left) with Jeremy Diamond.

he need for capital has brought the sale
and leaseback of commercial and industrial
property back into the spotlight as a practical
corporate finance tool according to Jeremy Diamond,
head of Seeff ’s Structured Sale and Leaseback business.
The division recently brokered a record R2.7 billion
transaction, working with at least half a dozen leading
companies in South Africa over the last few months,
and sees this as one of the fastest growing areas within
the commercial property sector.
The details
In simplistic terms, this type of transaction involves the
sale of freehold property to an investor on the basis
of a leaseback to the selling company, says Diamond.
Cash replaces the asset on the balance sheet and the
company (seller) remains in effective control over the
property. The buyer signs an institutionally based lease
on a fully repairing and insuring basis at a fair open
market rent and, on mutually beneficial terms.
For the investor (buyer), the benefit lies in the value
appreciation of the property during the lease term
while it often requires little management. Diamonds
says that long-term leases are also attractive to lenders,
enabling high debt leverage. Additionally, the positive
cash returns may also improve during lease term to
facilitate refinancing, if necessary.
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Financing technique
The sale and leaseback mechanism allows companies
to create liquidity through the sale of a fixed asset.
Diamond therefore proposes it as an excellent
financing technique given that annual lease costs can
be equated to interest on finance. Based on current
forward yields, businesses may in fact find it more cost
effective to enter into such a transaction as opposed to
the borrowing costs that they currently have on their
balance sheets.
Expert advice
In terms of what works best for this type of transaction,
Diamond says that minimum purchases of R50 million
and upward are typically sought, but properties can
be grouped into a package. Major metropolitan and
especially properties near major interchanges or in
industrial office parks or growth nodes are the most
attractive.
He cautions though that sale and leasebacks are
generally intricate and strongly advises that any
company embarking on this type of transaction should
seek professional advice from their auditors and
financial advisors, and should work with a specialist
broker.

October 2014 SA Real Estate Investor

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