Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 337

Sale and leasebacks benefit both companies and investors

In the current low interest rate environment, corporate Australia is revisiting their property occupancy strategies to unlock value. For companies that own and occupy their property, a sale and leaseback transaction can be an astute business strategy. At the same time, the sale can provide attractive, long-term assets for funds and their investors.

Company ability to monetise an asset

Given the strong demand from both listed and unlisted property funds for long-term leased properties, together with the historically low cap rates (yields) at which these properties currently trade, it is an ideal time for corporates to monetise their property assets through a sale and lease back transaction.

A sale and leaseback arrangement effectively separates the ‘asset value’ from the ‘asset’s utility value’. A company can crystallise value and redeploy the capital tied up in a low-yielding property back into their business at higher rates of return in a more productive use. This might include acquiring another other business, paying down debt, or undertaking a return of capital to shareholders via a special dividend or share buy-back.

Sale and leaseback transactions have become particularly attractive to private equity firms acquiring ‘property rich’ companies. By carving out the property from the business concurrent with, or post, acquisition, the private equity owner has the potential to unlock a materially higher value for the asset than they paid for it. Often, there is a disconnect between a lower cash flow multiple paid to acquire a business which is property rich and the higher cash flow multiple placed on an asset-light enterprise.

How a company retains control and flexibility

With debt costs at record lows, an easy option for corporates is to utilise debt capital and borrow to assist in funding their business. However, the debt is typically only available for a short period of time (say three to five years) creating rollover risk. It may also come with arduous covenants, and only unlock between 30% and 65% (loan to value ratio) of the value of the property.

Given the low cost of debt, the lease payments under a sale and lease transaction may be more expensive than the interest payments on the debt, but a sale and leaseback can provide greater certainty to the company due to a long-term lease. The company can also secure 100% of the value of its property assets in cash.

For many companies considering a sale and leaseback, the ongoing control and use of an operationally critical property is paramount to the long-term objectives of the business. An appropriately structured sale and leaseback can allow the tenant to retain possession and continued use of the property for the lease term.

Typical sale and leaseback leases are triple net which means the tenant is responsible for outgoings, repairs and maintenance and most capital items. The leases are for between 10 and 20 years, although in some cases may be longer. The company may also negotiate lease extension options giving even longer-term certainty. In some cases, they may include terms for early lease surrender if more flexibility is required, and the new owner is comfortable to take on the risk of reletting or converting the property to an alternate use down the track.

Examples of long-term sales and leasebacks

Charter Hall has been involved in more than $6.5 billion of sale and lease back transactions in the past few years with high quality, creditworthy covenants such as the Federal Government, BP, Telstra, Coca-Cola Amatil, Ingham’s, Bombardier Transport, Virgin Australia, Arnott’s, Bunnings and Woolworths. These transactions span a range of property sectors including office, industrial, social infrastructure, pubs, convenience retail, fuel outlets and large format retail.

In one of Australia’s largest sale and leaseback transactions, in August 2019 Telstra sold down a 49% interest in 37 telco exchanges to a Charter Hall led consortium for $700 million. The deal was struck on a capitalisation rate of 4.4%.

Telstra’s CEO, Andy Penn, said the deal was part of Telstra’s strategy of monetising up to $2 billion of assets to strengthen its balance sheet. Under the terms of the transaction, Telstra retains a 51% controlling interest in the entity that holds the assets and retains operational control of all the exchanges. In return, Telstra signed a long-term triple-net lease with a weighted average lease expiry of 21 years, with multiple options for lease extension to accommodate ongoing business requirements.

Opportunities for investors

More recently, private equity giant KKR, as part of their deal to buy iconic biscuit manufacturer Arnott’s from Campbell Soup Company, immediately on-sold Arnott’s Australian production facilities. Charter Hall’s acquisition, through its unlisted Charter Hall Prime Industrial Fund (CPIF) and the ASX-listed Charter Hall Long WALE REIT (ASX:CLW), of Arnott’s 59,000sqm facility in Huntingwood in Western Sydney for $397.8 million, on a passing yield of 4.5% is one of the largest individual industrial asset sales recorded in Australia.

Arnott’s signed a 32-year triple net lease with multiple 10-year options giving certainty of tenure over their premier Australian production facility, as well as unlocking significant capital to the new business owners.

The 32-year lease and uncapped CPI plus 0.5% annual rent reviews provide an attractive long-term investment with inflation protection to the CPIF and CLW investors.

Companies should consider capitalising on the growing demand from property investors for long-term predictable income returns as part of their overall capital management plan. A well-structured sale and leaseback programme provides access to an alternative source of long-term capital which can enhance the overall capital efficiency and value of their business, and place the asset in the hands of investors seeking long-term income security.

 

Adrian Harrington is Head of Capital and Product Development at Charter Hall, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any investor.

For more articles and papers from Charter Hall (and previously, Folkestone), please click here.

 

RELATED ARTICLES

Has Australian commercial property bottomed?

What’s next for Australian commercial real estate?

Pub property: a parma, a pint and a profit

banner

Most viewed in recent weeks

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.