Europe’s sale and leaseback market has never been busier. Last year, owner-occupiers sold €27bn (£23bn) worth of their buildings before renting them back, according to JLL – a record amount.
This year is expected to be another bumper spell. But not all corporate premises are created equal, and one of the best-known backers of such deals is shying away from office acquisitions as the debate over the future of the traditional workplace continues.
At WP Carey, which has a portfolio spanning the US and Europe with a rent roll of $1.2bn (£850m), head of European investment Christopher Mertlitz (pictured) says the company’s goal is to buy buildings that are “mission critical” for the tenant, to ensure they stick around beyond the initial lease length. The problem with offices, Mertlitz adds, is that knowing which are mission-critical is increasingly tough.
“It’s not impossible, and we have a substantial portion of our portfolio in office, so we’re not saying we’ll not do any more deals,” he says. “But it is certainly harder to prove criticality in an office building. There are ways to do it if it’s the corporate headquarters, or if it’s an office building right next to a company’s main production site. But for your generic office it’s much harder to say. That’s the thing missing for me, and why we don’t invest a lot at the moment in offices.”
That’s not to say Mertlitz and his colleagues have been twiddling their thumbs. “The market is opening up again,” he says. “Corporates are looking to raise new capital to pay down debt, to acquire another business, for all kinds of means for which a sale and leaseback is useful.”
And owners are increasingly approaching WP Carey about a deal rather than vice versa. “There are still a significant proportion [of deals] – larger than usual – that happen off-market. Everything we’ve closed this year was effectively an off-market deal,” Mertlitz adds.
Those deals have underscored WP Carey’s focus on buildings that the tenants cannot do without. Last month, the firm paid £140m for a Prologis-developed warehouse in the West Midlands leased for 30 years to Jaguar Land Rover. Mertlitz describes the acquisition as “a typical WP Carey deal in so many ways”. The 1.1m sq ft site – bought from the developer, not the tenant – is the main logistics building serving the manufacturer’s Solihull production plant. “You can’t run your main production site without this warehouse,” he adds.
Earlier in the year, the firm struck a €102m sale and leaseback of three sites with hypermarket operator Casino in the south of France. “They’re some of the best-performing stores this company has – these are critical locations, very hard to replace, very important for the company,” Mertlitz says.
And as luck would have it, one of those Casino sites is a stone’s throw from one of Europe’s leading real estate conferences, where Mertlitz hopes he’ll soon be able to source more of these off-market purchases.
“In case we ever go back to MIPIM again, I can only encourage you to take the coastal road from Nice airport to Cannes and you’ll drive past the [Casino] store,” he says. “Buy some food, it helps them to pay our rent.”
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