Small and medium enterprises (SMEs) which own office and industrial properties and want to expand their businesses can escape much of the fallout from higher interest rates if they sell their buildings in sale-and- lease-back agreements to raise expansion capital.

Darryl Horney, co-founder and director of Spirit Capital, which creates deal structures for both listed and unlisted companies, said on Tuesday that higher bank borrowing costs had affected the ability of privately owned businesses to expand.

Horney said many SMEs owned the properties from where they operate and had benefited from the substantial increase in the value of property over the past few years.

Kevin Homann, also a co-founder and director, said that if these smaller businesses were looking for expansion capital, one of the best ways was to realise the value of their properties at these high levels and enter sale-and-lease-back arrangements.

"They will get the proceeds on the sale of the property and they still have security of tenure over a five- to 10-year period in terms of a lease agreement. They can also negotiate a right of first refusal, meaning that if the new landlord decides to sell at a later stage, he first has to offer to them," said Homann.

He said the listed property sector was desperately seeking property in a market where there was a shortage of quality stock. It would be eager to buy these properties, he said.

He believed interest rates were going to start to rise, and SMEs now had a window of opportunity to take advantage of high property prices.

Brian Azizollahoff, CEO of listed property loan stock company Redefine Income Fund, said being a landlord was not ideal for small and medium enterprises.

"They should be renting, because renting gives them flexibility to move as their businesses expand or contract. With sale and lease back, the enterprise releases valuable working capital which really does mitigate in favour of renting."

He said listed property companies would be interested in this type of property transaction, depending on the quality of the tenant.

"It depends on the tenant covenant. If it is a good company there would be interest."

David Green, MD of office and industrial property brokers Pace Property Group, said he expected a trend towards sale and lease back to develop.

Business Day
Publisher: I-Net Bridge
Source: I-Net Bridge