Sweating the Assets - Unlocking the Value of your Portfolio

If you are responsible for a corporate’s real estate and are looking for ways to prove your worth by creating value for the business, you are in good company. Creating an income stream from corporate real estate is the potential upside of right-sizing in this hybrid working world. Raising investment capital from sale and leaseback is a real possibility as investors of all sorts seek steady, long term income in this politically volatile world. 

Plans to unlock portfolio capital should be considered very carefully at the outset. Once implemented many can’t be easily undone and sometimes there is a one shot opportunity to raise the most money which can’t be easily repeated. So structuring and valuation are key in co-ordination with your real estate advisers and your lawyers. Do you even have a definitive record of what the company owns? That’s not a surprising first step as an initial property audit is often essential, especially for companies that have grown through merger and acquisition or which have owned large manufacturing sites for decades. Fortunately technology has made the searching for and identification of property owned by corporates that much easier, so the combination of tech, corporate and legal review will show what you’re working with.

The routes towards successful capital raising or income stream setting are dependent not just on the asset class (office, retail, industrial), but also on its tenure (freehold, long leasehold, rack rental leasehold), and the legal restrictions on ownership and transfer. This initial legal due diligence is essential before any proper considerations as to structuring to produce best value. Legal due diligence for one HQ office block is relatively straightforward; legal due diligence for a mixed portfolio of tens of properties, or a large portfolio of hundreds of similar properties is more of a challenge. Similarly technical due diligence is key from the outset, particularly for assets requiring a number of statutory consents or consultant surveys/reports, to ensure that a property is ready to take to market.

Technology can help with legal and technical due diligence which, combined with efficient legal project management and an experienced legal team, can prevent costs escalating before there’s even any sign of money to be made. Pre-empting key risks and being on the front foot when going to market is now much more accessible, through collaboration with LegalTech and PropTech partners. Solutions range from the basic: dataroom structure, naming conventions and defining risk metrics; to more complex: AI lease reviews to extract key terms, interactive plans to show clear ownership boundaries, and multi-dimensional legal data allowing for analysis across the hierarchy, at site, asset and title level. Risk snapshots around ownership, access and lease terms are available in minutes rather than the weeks taken to receive Local Searches, and at a fraction of the cost. Whilst full diligence will be required at some point, the richness and accuracy of what is available immediately can provide significant value as the strategic direction is set.

Once that initial preparation is done, there’s a whole variety of possible transactions to consider alongside legal and real estate advisers with the very best results being achieved by holistic consideration across a portfolio and across jurisdictions. Headlines on some options are:

• Sale – analysis of use and ownership might show that some property is simply surplus to requirements or that the business can be relocated elsewhere at a lower cost. A “readiness for sale” legal exercise or development constraints legal report can inform valuation and might be the route to spotting unexpected opportunities as to sale for development or change of use including in emerging sectors such as Build to Rent. Marking assets for sale might also arise from a corporate’s ESG analysis with poorly performing energy assets being first in line for disposal.

• Leasing – an income stream could be generated from surplus freehold property or, most likely needing landlord’s consent, underletting of surplus leasehold property. Or licensing or sharing occupation of a site with a concessionaire or an advertising hoarding. Leasing for EV charging points or solar panels could generate income and reduce the business running costs.

• Sale and leaseback of a single asset or a collection of assets (freehold or long leasehold) – a traditional route to unlock capital but one which needs a careful balancing of sale price and operational freedom to align with future business strategy. This could be combined with a buy back option or at least a contractual option to renew the lease so that the company isn’t dependent on lease renewal rights under the Landlord and Tenant Act 1954 (which are presently under Law Commission consultation and may well change over the term of the lease). Or a sale and a very short leaseback could be a first step towards exiting a site.

• Assets as security for lending – again usually only a route to raising capital available where assets are freehold (or perhaps long leasehold though variations to the lease might be necessary to make it suitable as security). Repayable, redeemable and gives capital without giving up an asset.

• Ground rent lease financing – finance repayable through rental income generated from a ‘propco/opco’ group structure – a transaction made up of several parts which brings its own legal complications.

• Credit tenant leasing – available to those entities with the very strongest covenant strength this is a modern take on the traditional sale and leaseback using bespoke tax planning to produce the very highest sale price.

• Conversion of poorly performing assets – from assets in demand back in the day to the type of property in demand today, such as cold storage, food production or data centres. Though this is heavily dependent on the availability of power and, of course, planning permission.

• Leasehold liability transfers – where an expert third party takes on the responsibility for (but not the title of) unwanted leasehold properties in order to bring the liabilities to an end (by way of assignment, surrender, break etc) in return for an incentive sum.

There is rarely a silver bullet for unlocking value from a property portfolio and a full consideration of all potential options will be needed depending on the type of asset, nature of ownership, market appetite and business objectives.

If you would like more information on anything mentioned above please get in touch with one of our key contacts below.