M&S shows how to release property value and keep it too
Marks & Spencer’s innovative deal to use the value of its real estate to fund its pension deficit without relinquishing control of any properties will intrigue many companies. Many are carrying more hidden value in their property than in their core business. And while they all want to cash in on that, most would rather not cede ownership of the buildings that they need to operate from and which are rising in value. Peter Lee reports
Marks & Spencer is the latest company to cash in on its large portfolio of property assets to meet a pressing corporate financing need. Faced in March 2006 with a triennial actuarial valuation of its defined benefit pension scheme that showed a deficit of £704 million (and an IAS19 valuation at the end of September 2006 putting at £1.032 billion), the company urgently needed to agree a plan with its pension trustees to fill the hole. At the end of January 2007, it unveiled a scheme to do so by using its valuable portfolio of property.
M&S follows many other retailers that have sold and leased back or securitized through commercial mortgage backed securities (CMBS) their property assets to raise capital or low cost funding. But M&S has managed to achieve its goal of closing the pension fund deficit immediately, without relinquishing ownership and control of its property and without even fully encumbering it with a secured charge.
Other companies will be taking note across the UK, Europe, the US and in emerging markets. Many large companies, including most of the retailers, have been wrestling for years now with two contradictory impulses: they want to release value from their property holdings especially as rising property prices suggests their value is much higher than recorded on most balance sheets: but they don’t want to hand over the keys to the premises from which they expect to conduct their businesses forever.