As we approach month three of lockdown in the UK, sale and leasebacks are dominating trade press headlines. Occupiers looking to free up capital are considering their funding options and have jumped on the opportunity to sell their assets. From retailers like Next, Matalan and Waitrose to flexible office giant IWG, major owner occupiers have recently planned more than £500m in possible sale and leasebacks.
The deluge of deals is yet another sign that owner occupiers – who own about £400bn, or 45%, of the UK’s real estate base – increasingly face a mismatch between their assets and their needs. In order to solve that mismatch, we need a new approach to corporate fundraising.
The issues owner occupiers face have existed for far longer than the lockdown has, stretching back to years of evolution in how people work and occupy buildings. Corporates have struggled with knowing how technology, the economic environment and social demands will affect how much real estate they need to occupy in the long-term. As a result, flexibility has become increasingly important.
Despite the benefits of owning real estate directly – low fixed costs and limited outgoings – the pace at which companies move does not necessarily align well with being encumbered with long-term, inflexible real estate assets.
The coronavirus pandemic has exasperated this. Beyond creating an immediate need for capital, the pandemic has forced many of us to work from home and, in the process, made occupiers like Barclays question the extent to which we will ever return to ‘normal’ working practices – or office occupancy. It’s perhaps too early to know whether this will be a catalyst for a wholesale workplace revolution, but change is undoubtedly in the air.
So, what options do owner occupiers have?
As we have seen in recent weeks, sale and leasebacks are an option. Investors are, after all, on a hunt for yield and looking to buy into yield from corporates that are releasing cash. The downside is that occupiers entering into these arrangements can find themselves with a reduced asset base, ever-rising rents and alterations clauses that can restrict their business – something we have seen time and again over the last several decades.
Another option is debt. Low interest rates and wide availability of debt has made this attractive, although lenders are wary of the gearing levels of businesses they feel might come under strain in coming years. For those businesses themselves, debt can also severely restrict their operations, especially in economically precarious times.
IPSX Wholesale, the new FCA regulated stock exchange, helps owner occupiers avoid these pitfalls. Listing its real estate assets on the exchange allows issuers to secure new institutional investment. But, crucially, with no prescribed minimum free float, owners have flexibility over how much of the assets to retain or sell – and the option to buy back the raised equity at any stage.
IPSX gives owners a source of funding that lets them retain the level of control and flexibility they want. It also offers the additional optionality of employees holding a stake in the vehicle through shares. In other words, businesses can deal purely in flexible equity and not get tied down to restrictive debt arrangements, repayment and refinancing cycles or future risks associated with sale and leaseback deals.
These last few months have spawned fresh challenges for businesses that were already looking to occupy the most economically efficient and flexible footprint they could. Having a capital markets approach that is both new and flexible, innovative and regulated, an approach that has both financial advantages as well as ownership advantages, provides a much-needed new alternative to capital fundraising.