The benefits of a leaseback scheme are many, taking property off a
company’s balance sheet while allowing retainment of bricks and mortar, I wrote for CFO in April 2003.
Who wants to own property? The answer, in the corporate sector, is few companies. And those corporates which do own property want to sell it – or take it off balance sheet – and invest the cash more effectively in the core business.
Frank Hack, director of corporate solutions, Lend Lease, advises large clients on the lease versus buy debate. His clients have included National Australia Bank, the Commonwealth Bank of Australia, Compaq and IBM. He says: "People are divesting property. It’s more common that people are selling than buying. It’s just not seen as a viable option."
Australian companies still have to make headway in selling their property assets, however. Over 65 per cent of Australian companies own their property assets compared to 30 per cent in Britain, according to research by Russell Kenley, a senior lecturer at the University of Melbourne.
One of the recent trends to emerge is for companies to enter leaseback deals, which effectively take property off balance sheet while retaining a tenancy on the property. In late 2002, Telstra took seven prime offices worth $570 million off balance sheet.
Holden in February announced a similar deal where it would lease back some of its properties in Port Melbourne as part of a $200 million redevelopment of its Fisherman’s Bend site, to create a new headquarters for 1500 employees. Holden chairman and managing director Peter Hanenberger says the sale and leaseback deal would allow the company to maintain its capital investment in Australia – it has committed to spending $2 billion between 2001 and 2006. "It will create operating efficiencies, reduce structural costs and enhance security for our employees, facilities and intellectual property," he says.
The argument for leasing is compelling for many, especially subsidiaries of overseas parent companies, which have to deliver maximum profits back to head office.
AAMI, which is part of the upcoming Promina float, is reported to be looking for 14,000 square metres of space in Melbourne. The company won’t comment on whether or not it plans to move. However, a spokesman did say that the company leases all its property. Historically, as part of Royal Sun Alliance, the company has had no choice but to lease so it can provide maximum returns for its owner.
General Electric takes a similar approach, as does Shell, which prefers leasing for maximum flexibility given the dynamic and changing nature of the energy business. Most professional services firms, which are among the biggest occupiers in Australia, lease – partly driven by the complexity of partnership/ownership structures.
Lend Lease’s Hack says: "Leasing would come out even better based on the tax benefits. A lot of people don’t like to be property owners if they are mainstream businesses. You look at the lawyers and the accountants: they are in the business of providing services, and property [occupation] is just a way of achieving that. For them to say ‘we are going to take an ownership position’ just doesn’t make any sense at all; they are complex organisations because of their ownership structures."
Hack advised Compaq when it consolidated premises after its merger with Tandem and Digital. He helped evaluate the issues for the move, in which the focus was on leasing rather than buying. Compaq conducted a pitch among developers to find the ideal site for its consolidation. This is an approach taken by many companies now. Telstra also undertakes pitches from property companies in evaluating the development options of its redundant buildings. Hack says of the pitch: "It is quite an attractive way for an organisation to go in the marketplace."
HSBC is typical of many organisations in not wanting to buy, and two years ago moved out of Sydney’s central CBD to 580 George Street, above Town Hall station. The bank, which is growing at 30 per cent a year and needs flexibility to expand, occupies 14,000 square metres in its head office and spends about $20 million a year on property. Over the past three years, staff numbers have growth by 50 per cent from 800 to 1200.
Garry McLennan, chief operating officer at HSBC, says: "We only lease in Australia. The reason is that we see ourselves as being a bank and not a property company. Leasing for relatively short periods with multiple option periods provides us with maximum flexibility in terms of restructuring our leased property portfolio to meet the bank’s changing needs." Typically, HSBC negotiates five-year leases with five-year options. It currently has 23 retail outlets. In the last two years it opened six new branches and expanded seven, and expects to open two to three outlets each year in the near future.
But while it needs property to service its customers, that is as far as the company’s relationship with bricks and mortar goes. "Our focus is on serving our customers not owning and managing a property portfolio," says McLennan. The company wants to redirect head office rental expenditure to customer-facing retail branches. "The money that has saved us has allowed us to put that expenditure into new retail branches." Indeed, the cost savings between the central CBD and the fringes are large.
Timing is another factor in entering into a lease. McLennan says: "We actually moved at a time in which accounting firms were merging, so there was surplus space in the market at the time and we strategically took advantage of that." The chosen building, 580 George Street, gave the company naming rights – bang smack above the Town Hall railway station.
"One of the things we were looking for when we were relocating was the transport access, an important factor in retaining and attracting new staff in a rapidly expanding company," McLennan explains. "We wanted to make it easier for our staff to commute to and from work, and also to maximise the population from which we can recruit. The location of an office may mean it is not attractive to people to work there." And while HSBC doesn’t own the building, it does appear to, having secured the naming rights. "Naming rights were important because we wanted the opportunity to own the building from a brand perspective. [The address at] 580 [George St] is a highly visible location."
The building was flexible enough to accommodate HSBC’s open-plan layouts and reduce space allocation to 10 to 12 square metres per employee – low for the average Australian employee, but comparative luxury for call centre staff, some of whom are allocated less than 10 square metres.
HSBC also wanted first right of refusal on a number of floors as the company expanded.
Lend Lease’s Hack says that the leasing argument doesn’t work for not-for-profit organisations – charities and those that receive membership fees, such as the RACV. Lease payments are not tax-deductible for non-tax organisations. Hack says for them it is better to own, with the bonus that they may benefit from capital appreciation in the future.
The only way that a lease would work for them would be if it were vacated space at a high discount with a free fit-out. Hack says: "At the end of the day, they get all the capital appreciation of the thing and there’s no tax benefit."