Current State and Recent Trends

The sale and leaseback (S&LB) market in Europe has witnessed significant growth and evolution over the past decade. In 2021, the European S&LB transaction volume reached €8.4 billion, which was 8.5% higher than the five-year average, despite an overall 18% drop in investment activity. The logistics sector has been a driving force behind this growth, with S&LB activity in this sector reaching a record €3.4 billion in 2021, approximately 15% higher than in 2019.

Several factors have contributed to the rise of S&LBs in Europe, including accelerated adoption across various company sizes and profitability levels, strategic financial engineering by private equity firms, the evolving debt landscape, high owner-occupation rates, and private equity optimization strategies.

Future Forecast and Drivers

The future of the European S&LB market looks promising, driven by several factors:

1. Corporate Credit Crunch: The ongoing dislocation in the European corporate credit market, with tightening lending standards and risk-averse banks, could drive an increase in S&LBs as corporates seek alternative forms of financing.
2. Economic Uncertainty and Liquidity Needs: As companies navigate economic headwinds and potential recession risks, the need for liquidity may prompt more businesses to explore S&LBs as a financing solution.
3. Attractive Pricing and Yields: S&LB transactions are typically priced at cap rates ranging from 7% to 9%, offering an attractive cost of capital for property sellers.
4. Sector-Specific Opportunities: Sectors like logistics, healthcare, and technology may present attractive S&LB opportunities due to their resilience and growth potential, attracting investor interest.
5. Emphasis on Sustainability and ESG Compliance: As environmental, social, and governance (ESG) considerations become increasingly important, S&LB transactions may prioritize energy-efficient and sustainable properties to align with ESG goals and regulatory requirements.
6. Lower Interest Rates: Central banks are anticipated to initiate policy rate cuts by mid-2024, albeit at a more measured pace than the recent rate hikes. Lower interest rates typically act as a stimulant for real estate transactions, as reduced financing costs render transactions more attractive for investors, bringing more buyers to the market and driving economics for potential sellers.
7. Resurgence in M&A Activity: With global rate cuts expected in 2024 and private equity funds holding significant dry powder, dealmaking is expected to pick up, potentially leading to an increase in S&LB volume as a result of M&A transactions.

While economic uncertainties and potential recession risks may soften overall transaction volumes, the S&LB market in Europe is expected to remain robust, driven by the need for alternative financing solutions, attractive pricing, sector-specific opportunities, and the anticipated resurgence in M&A activity and lower interest rates.