Page 41 - Food&Drink Magazine May 2022

over the past 24 months. In some areas land values doubled over the period.
This is a global phenomenon driven by our changed buying habits due to the pandemic and the huge increase in online purchases. In turn, this has led to a rapid increase in demand for warehouse space. The demand for space has outstripped supply and it is
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basic economics that this will push land prices upward.
Manufacturers that own and occupy their land may have an opportunity to realise this uplift in value and re-direct that capital into core business. There are a number of potential strategies that an owner occupier could adopt. My focus here is on the option of a sale and leaseback.
A number of clients we are advising have, or are seriously considering, adopting this strategy, taking advantage of the strong industrial market.
A sale and leaseback transaction is when a company (the seller) sells its property to another company (the buyer). The buyer then becomes the landlord, and the seller leases the property back from the buyer, becoming the tenant.
Entering into a sale and leaseback transaction enables the seller to immediately receive funds from the buyer by selling the asset, while retaining the right to use the asset.
There are a number of potentially beneficial reasons to consider a sale and leaseback for an industrial property.
1CAPITALISE ON THE STRENGTH OF THE AUSTRALIAN INDUSTRIAL
PROPERTY MARKET
Australia industrial properties, like the rest of world, are in high demand. Properties with existing long-term leases and good quality, reliable tenants are most desirable. As a result, yields have been tightening and these properties, are achieving
sub-5 per cent yields. (The yield is calculated as the return the current rent of the property based upon the purchase price paid by the investor.) So, as yields tighten and go down, sale prices go up.
2×
SOME INDUSTRIAL LAND VALUES HAVE DOUBLED IN TWO YEARS
directly into core business needs such as new fit-out, technology, warehouse managements systems, AI, and robotics. The big advantage of a sale and leaseback is that all of this can happen in a relatively seamless manner as you don’t have to relocate, thereby avoiding the business interruption associated with a relocation.
The equity in your property on the back of the growth in the industrial market is likely to have increased in the past few years. A sale and leaseback is an effective tool as a means to raise capital in a relatively simple
manner and as an alternative to the more traditional debt funding route.
In conclusion, there are a few words of caution.
A sale and leaseback may not be the solution in all cases. For example, there would be little point in entering into a sale and leaseback if your current property is old and dysfunctional and unable to be re-configured to suit your growing and/or changing needs. It may be more appropriate to realise the uplift in value of the land and lease a new purpose- built facility. This would enable you to utilise the proceeds from the sale for new plant, equipment, technology, and systems in a new facility.
It’s also important to consider the lease structure in conjunction with the agreed commercial terms. Keep in mind that you will need to comply with the lease for possibly the next 10-15 years.
There is a need to strike a balance with the lease terms in order to make it attractive to an investor whilst being financially and commercially sustainable foryourbusinessoperations. ✷
✷ ABOUT THE AUTHOR Tenant and occupier
advisory group LPC
director Michael Raymond
leads its Industrial and
Adelaide businesses. He
has 30 years’ experience
in complex real estate leasing, acquisition and divestment transactions, portfolio optimisation and the re-positioning of redundant sites.
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UNLOCK CAPITAL
AND REINVEST IT
INTO YOUR BUSINESS
Real estate is a valuable, relatively liquid asset and through a sale and leaseback you can unlock that value to re-invest
AN ALTERNATIVE
TO CONVENTIONAL FINANCING
PLANT DESIGN & FITOUT
www.foodanddrinkbusiness.com.au | May 2022 | Food&Drink business | 41