Innovations in Islamic Finance 2015: Al Rajhi Capital Sale-leaseback
This small but interesting deal shows a useful approach to an important matter: Shariah-compliant methods for exiting large-scale commercial real estate developments in Saudi Arabia.
The Lulu Hypermarket is a shopping centre with 22,000 square metres of retail space in east Riyadh, built by the Almutlaq Group. It’s one of more than a hundred retail stores the Lulu Group operates around the Gulf.
Institutional investment in commercial real estate is in its infancy in Saudi Arabia, and highly fragmented; exit mechanisms, and the uncertainty around them, have been a key reason the market has not developed.
The Lulu deal, arranged by Al Rajhi Capital, involves a sale-leaseback structure that sets a new model in Saudi Arabia for developers to exit existing projects and redeploy the capital in new ones. The owners or users of the real estate assets are able to monetize the full amount of the project value, and can recycle the cash to fuel the future growth of the underlying sponsors, Al Rajhi says.
“The deal structure is very attractive to potential sellers as it helps generate cash equal to the full value of the properties while keeping intact the use of the facility by the seller for a long period of time,” the bank says.