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Sale and leaseback set for new lease of life under IFRS 16

By Paul Norman - Wednesday, February 14, 2018 8:24

While some commentators are predicting the death of the sale and leaseback with the introduction of IFRS 16 in 2019, CBRE has issued a report countering the view and arguing it will continue to offer major benefits to corporate occupiers as the benefits of the capital raising.

Following a number of recent major commitments to S&LB transactions by blue-chips including KPMG, Lloyds Banking Group and DHL, CBRE’s latest report, Raising Capital from Corporate Real Estate: Opportunities from a changing environment, examines the implications of IFRS 16 and finds that most tangible benefits of a S&LB will remain, which will help to underpin demand for S&LB as a way of raising capital for corporates.

The IASB published IFRS 16 Leases in January 2016 with an effective date of 1 January 2019. The new standard requires lessees to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments.

CBRE bases its positive outlook on a range of findings:

• Other benefits of a S&LB will compensate for loss of ‘off balance sheet’ financing benefit - Whilst the ‘off balance sheet’ nature of a S&LB was historically an advantage, it was not the only benefit from a S&LB. Whether a S&LB is the right strategy for a given scenario or corporate occupier will depend upon a balance of operational, financial, property and market considerations. For the right real estate and occupier, the S&LB "can be a highly cost effective and liquid alternative to bond issues or bank debt raising" CBRE writes.

• Impact on balance sheet gearing and loan covenants will be far less than many expect and primarily sensitive to a company’s specific circumstances - For some, the changes to lease accounting under IFRS 16 could provide new opportunities by boosting shareholder value and capital structure efficiency in the short term - as well as reducing tax liabilities.

• The structure of S&LBs will determine their effectiveness - CBRE anticipates the largest impact of IFRS 16 will be the requirement to pay greater attention to the structuring of any S&LB, to ensure the positive opportunities are captured and any negative effects mitigated.

Paul Lewis, Head of CCM EMEA at CBRE, said: “IFRS 16 has stimulated increasing sector and press speculation regarding the future of S&LB activity. While companies will lose the ‘off balance sheet’ financing benefit of a S&LB, we believe this will be offset by the more tangible benefits of this form of capital raising, which will be unaffected by these changes. As a result, we see demand for S&LB transactions remaining robust, as evidenced by recent transactions by the likes of KPMG, Lloyds Banking Group and DHL, although we do anticipate more structured deals that address specific needs and the impact of changing legislation.”

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