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Sale and leasebacks are a trend guaranteed to continue Back  
One of the most notable trends of the past year in the property market has been the record number of sale and leaseback deals concluded. Major companies such as AIB, United Drug and Thomas Cook have all been involved in significant sale and leaseback transactions. AIB raised €78 million on its Capital Markets headquarters in the IFSC, United Drug raised E40 million on its new facility in Citywest, and Thomas Cook €9 million on its Grafton Street premises.

Property sale and leasebacks are not a new idea but the acceleration of such transactions in Ireland is part of a European phenomenon driven by a number of factors. In the more demanding economic climate of recent years, it has made sense for many companies to raise money on their own properties. And low interest rates have made the already close links between property and finance even closer.

The commercial property market in Europe was estimated by Jones Lang LaSalle to be worth €4,600 billion in 2003. Approximately two-thirds of this property is owned by corporate occupiers. In the US, on the other hand, the proportions are roughly the other way around; only 30 per cent of American property is owner occupied. US multinationals have also exported that tendency when they locate abroad: Microsoft, for instance, has been involved in sales and leasebacks in Ireland for some time.

Europe has been following the US trend and Ireland is obviously part of that. It is estimated that the total amount of sale and leaseback deals in Europe in 2003 amounted to E9 billion, or 13 per cent of total market deals. Deals during the year included the E1 billion sale and leaseback by Deutsche Bank of properties in six European countries, Agfa in Italy and Kodak in Spain.

The transactions in Ireland this year also indicate the range of sectors that have found good reasons to sell their properties and lease it back. The key attraction for companies is the flexibility that such arrangements can offer them as well as the prospect of getting a higher rate of return on capital that has been tied up in their property. Companies for whom real estate is not a core business should obviously be able to generate a higher rate of return in their own businesses than on their property assets.

The closeness of the relationship between property and finance has significantly increased the flexibility that is now available to companies pursuing this route. As well as traditional sale and leaseback arrangements, there are a variety of options available including securitisations, joint ventures, structured finance/leveraged leases, and PMI. The structure of any sale and leaseback can be designed to achieve a balance between the future outgoings of the business on the property and the amount of capital it wishes to raise.

Sale and leasebacks can realise assets without increasing liabilities, attract the lowest cost of capital by maximising the value of the covenant, and minimise balance sheet impact as well as managing the impact on earnings per share, key ratios and credit ratings.

For investors, on the other hand, the main considerations will always be the quality of the asset, the strength of the covenant, and the return available.

Given the flexibility now available in setting up sale and leasebacks, it is certain that the current trend will continue and that more and more companies who have traditionally owned their own properties will look into the potential benefits for them.

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