Banks build on sale-leaseback hopes

THE REAL-ESTATE market in Europe is flourishing. Investment banks have cut back teams in many asset classes but in real estate are still hiring. For example, in September Nomura created its first real-estate finance team, with the poaching of CSFB's two heads of real-estate finance - Gary Wilder and Derek Vago. It has since hired two more bankers, and is bringing the group's first securitization to market.

Lehman Brothers has also made some recent hires to expand its real-estate team in Italy and France, and has moved bankers from other parts of its fixed-income business to focus on real estate. Three years ago Lehman had 12 people working on European real estate. Now it has around 60. "Real estate is one business that is still looking rosy," one vice-president says.

These appointments are part of a wider growth in the number of professionals working in European real estate. One of the biggest European real-estate conferences - MIPIM in Cannes - had around 7,000 delegates in 1997. Last year, in March, more than 15,000 attended. Many represented opportunity funds from the US or farther afield. One big reason for this swelling of the ranks of real-estate bankers is the expectation of what Nomura's Gary Wilder calls "a large transference of assets from corporates to investors".

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Corporations can divest themselves of real estate in different ways: they can do a true-sale securitization, a synthetic lease (these were popular in the mid-1990s) a straight sale or a sale-leaseback.

The most popular current type of corporate deal seems to be the sale-leaseback, which is an easy way for over-leveraged European companies to reduce or service their debt levels, when the bond market is difficult to enter.

UK retailers Marks & Spencer and Iceland, hoteliers Thistle Hotels and Hilton have all done sale-leaseback deals this year.

Other companies said by bankers to be planning such transactions in the near future include Endesa, the cash-strapped Spanish electricity company, which recently promised to reduce its debt levels through e6 billion of asset sales; Metro, the German retailer, which has a real-estate portfolio of around e2.8 billion; and Deutsche Telekom, said by one head of real-estate finance to be in the final stages of a sale-leaseback transaction.

The trend is expected to spread from Europe to the US and Asia. For example, when Teskid, a subsidiary of Fiat, bought a metallurgy factory in Alabama recently, it sold it to CRIC Capital for $20 million, then leased it back. Teskid probably learnt the trick from its parent, which raised around $460 million in 1999 through a sale-leaseback deal with Morgan Stanley.

Sale-leaseback transactions give corporations more ready cash than the other popular method of releasing funds from real estate - securitization, a strategy that such companies as Canary Wharf have followed. The downside is loss of management control over the assets. However, banks have worked hard to increase contract flexibility on recent sale-leaseback deals.

For example, in the UK pub sector Laurel Pubs is undertaking a sale-leaseback deal of its 606 managed pubs, which it is selling to Nomura and London & Regional Estates for about £300 million ($468 million). Gary Wilder, Nomura's co-head of real-estate finance, says: "We've seen the securitization of tenanted portfolios. Now, we think the managed sector is releasing value through sale-leaseback deals."

The securitization route for corporates remains popular too, however. Wilson Lee, European head of Lehman Brothers' global real-estate finance team, says: "There's definitely growth on the securitization side of the business, with corporations finding it difficult to raise money on the traditional bond and equity markets at present."

Securitization seems to be a popular way for opportunity funds to exit from real-estate acquisitions from sale-leaseback deals. For example, Lehman is launching the securitization of e1.1 billion of real-estate assets that it and Italian real-estate fund Beni Stabili bought from and leased back to Telecom Italia in 2001.

Banks and opportunity funds are also hoping governments will be another source of real-estate assets, either sold or securitized. European governments are increasingly looking to real-estate portfolios as a way to reduce external debt and meet their Maastricht Treaty debt ratio requirements.

The main source of business for bankers will be the Republic of Italy, which told Euromoney in August of its plans to sell or securitize most of its real-estate portfolio - estimated by one treasury official at around e1.3 trillion - through an off-balance-sheet company called Patrimonio. Italy has already done some of the biggest commercial real-estate securitization deals, such as the e2.3 billion Società per la Cartolarizzazione degli Immobili Pubblici deal, led by Lehman Brothers' real estate finance team.

The expectation of all these government and corporate deals is driving a lot of investment into real estate, particularly into opportunity funds and German open-ended retail investor funds. US capital is looking for bigger returns abroad than it can get at home, and some opportunity funds are touting annual returns of around 20% on European investment.

Opportunity funds are a good way for foreign capital to invest in property without having to pay the corporation tax levied on investment in listed real-estate companies. This is also one reason investment in direct real estate is rising, while UK-listed real-estate companies are trading at a 34% discount to their net portfolios (see graph).