The impact of sale and leaseback on commercial real estate prices and initial yields in the UK

ABSTRACT This research evaluates the impact of Sale and Leaseback (SLB) on UK commercial property prices and yields, compared with arms-length transactions. Data on 357 SLB deals and 1266 non-SLB deals are extracted from CoStar and EGI. Hedonic regressions and comparative analysis with the risk-free rate are undertaken. In addition to the SLB dummy variable, explanatory variables include building size, quality, age, sector, location and year of transaction. SLB transactions are found to occur at a statistically significant price premium, with the greatest premium occurring in the office sector. SLB properties achieve a 4.5 percentage point premium compared with the risk-free rate. The net initial yield of the SLB transaction sample is around 2 percentage points lower than for the non-SLB sample in every sector. Reasons for these differences are probed by considering the effect of WAULT and tenant covenant strength. From a vendor’s perspective, the results give an indication of the price premium they might be able to negotiate for their property compared with market prices. This will help them assess whether SLB is worthwhile compared with other available financing options. The findings of a yield reduction should help investors decide whether to engage in SLB investment.