Last year saw huge growth in the demand for property investments throughout the UK across all property sectors with the leisure sector in particular coming into its own say sector specialists, CreevyLLH.
Director, Alan Creevy, says that many corporate hotel investment transactions achieved yields in the 5.5% to 6% level "only marginally above interest rates indicating a expectation for long term growth". However these corporate transactions tended to be in the £10m to £50m range and Creevy LLH has been looking into how this will affect lower-priced transactions.
Creevy LLH valued and sold various investments in 2006. One "live" example in particular, which Creevy feels clearly displays the rational for sale and leaseback and the reason for the likely growth in this area, involved the "off the market", confidential, sale of a well-located restaurant in Central Scotland.
"Very often, as with this case, the instruction starts with a request to sell a business and its property as a package. This is the norm in our business. However it soon became clear that vendor was happy with the business and the location but wished to raise capital to invest in a property abroad.
"The reason for sale and leaseback approach was the client’s desire to raise capital but without the risk of investing in a business elsewhere. So the business can be retained but importantly capital is released. There are numerous reasons why a person or company wishes to dispose of a property and we would always explore all the options available."
Typically Creevy LLH will always analyse the likely sale price of the property and business. “Given the turnover and profits of the business and the specialist nature of a typical restaurant operation with an element of “personal goodwill” we advised a likely sale price of £650,000 to £675,000 for the property and business combined and the clients were happy with that figure,” says Alan Creevy.
"However the business was producing a profit before directors salaries of £120,000 to £130,000 per annum. As such an affordable rent of £55,000 could be set. In such a deal we advised our client to ask us to place the property only on the market at a price of Offers Over £675,000 and thereafter to enter into a new 25 year lease with the successful purchaser at a rent of £55,000 pa.”
The final sale price was well over £700,000 with a large number of bidders. The investors were seeking a good quality investment for which they were happy to pay a premium price and our clients received a large capital sum for the sale and remained in place as tenants. Clearly there future profits would be reduced with the rent cost. However as Creevy’s clients received a large capital sum the requirement for profits was not as great.
So how can this Sale & Leaseback approach work for you? How can a property sale only, that is without the benefit of the business and furnishings, equipment and goodwill, achieve more than the going concern?
"This is not always the case but when a property is well located and in good order, and the owners are willing to enter into the right type of long lease agreement and have a genuine desire to stay in place, the result is quite simply “win win” because there is now a valuable leasehold interest which they could sell on at a price of around £100,000 to £150,000. The total return therefore is very significantly higher than a simple sale of the going concern.
"There is a massive pent up demand from investors seeking to acquire property investments with a tenant in place, many for long term pension provision."
Mr Creevy adds: "We are firmly of the opinion that under the right circumstances a Sale and Leaseback can maximise the return to the Vendor." The best options will vary depending on all the variables. However it is essential that all the options are considered to maximise the potential return.
How does this relate however to high profile insolvencies such as Swallow Hotels and London & Edinburgh Inns? "Well the theory was sound however it is quite evident that rents were not set at an affordable level. This does not mean the mechanism is invalid, it simply means that investors and tenants alike must ensure that rents are set at an affordable market rent to ensure both parties prosper in the long run.
"We very much look forward to the changing dynamics of the market in 2007. We fully expect to see a continued divorce from ownership and operation at all levels - from the multi-million pound hotel sale and leaseback deals down to smaller bar and restaurant sale and leasebacks. It's going to be a very interesting year !"