Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

London—Two kinds of retailers sold properties in the UK via sale-leasebacks last month. In one transaction, GE Real Estate UK and Paradigm Real Estate Managers Ltd. acquired a portfolio of 148 automotive repair shop properties for 103.7 million British pounds or approximately US$203.17 million. In the other deal, the British Land Co. and Tesco PLC closed on the sale-leaseback of 21 properties, with a purchase price of 650 million British pounds, or approximately US$1.28 billion, marking their fourth property transaction together in about 10 years

The Kwik-Fit auto repair properties are located throughout the UK, many in town centers, and have been leased back on 25-year terms, with fixed rent increases in years five and 10. The investment has an initial net yield of 5.3%. The leases, GE Real Estate UK managing director Mike Bryant tells NET LEASE forum, are FRI or full repairing and insuring--essentially the UK equivalent of triple net.

The transaction was appealing because it combines a stable income stream from the sale-leaseback with the value-add potential of redevelopment. The agreement among the three parties, GE notes, allows for the two investors to pursue redevelopment of some of the properties. Kwik-Fit will receive redevelopment profit after the investor JV receives a priority return. "We were particularly attracted to the redevelopment opportunity," says Bryant, who notes that in the UK, GE Real Estate more typically pursues value-add transactions since sale-leasebacks often trade at relatively low yields there.

West Lothian, Scotland-based Kwik-Fit Group, which operates more than 1,700 repair centers in the UK, France, Germany and Holland, is owned by PAI Partners, a European private equity firm that bought the company in 2005. It was advised in the transaction by Savills. Paradigm Real Estate Management was formed in 2001 by London-based Montagu Evans LLP to handle private equity investments in the property market for the advisory firm's clients and private individuals. Montagu Evans acted on behalf of the JV. Debt financing for the deal was provided by the Royal Bank of Scotland.

"We are very excited by the opportunities this acquisition provides," states Paradigm director Bill O'Hara. "The transaction provides a strong core income together with development options across the UK which provide the opportunity to work cooperatively with Kwik-Fit in obtaining relocations and maximizing development value."

Meanwhile, the Tesco transaction involves 21 superstore properties across the UK, all of which will continue to be occupied by the grocer for an initial 20-year term, with an early termination option in 2017. Rents are subject to annual indexed increases for the first 20 years, capped at 3.5% a year, and open market reviews begin in year 20. At that point, Cheshunt, England-based Tesco has options to either renew or buy back the stores at market value.

The transaction increases "our investment in one of our favored retail sectors, where we see significant growth potential," states London-based British Land investment director Robert Bowden. The company says it "is the largest owner of superstore properties in the UK other than the occupiers themselves." It was advised on the transaction by Colliers CRE, while Tesco was advised by Morgan Williams. The two companies have closed three other property joint ventures since 1996.

GE's Bryant notes that while Europe is still characterized by a higher degree of owner-occupied facilities relative to the US, sale-leasebacks are becoming more common there. "More European corporations tend to be owner-occupiers rather than tenants," he says. "We are beginning to see that change, and you are seeing more sale-leasebacks in the market."

Instant Insights /

Auto Chain, Grocer Close Sale-Leasebacks

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