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More firms buying, not renting offices

After decades of renting being the norm, companies with offices in the world's major cities are seeing more financial sense in buying their own buildings, prompted by a mix of cheap debt, stockpiled cash and new accounting rules.
Asia One - June 26, 2013
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More firms buying, not renting offices

 

SINGAPORE - After decades of renting being the norm, companies with offices in the world's major cities are seeing more financial sense in buying their own buildings, prompted by a mix of cheap debt, stockpiled cash and new accounting rules.
Having culled staff in the wake of the financial crisis, businesses are now scrutinising real-estate costs and capitalising on an opportunity - which has not been present for at least half a century - to cut what is often their second- highest outgoing.
As central banks keep interest rates historically low to kick-start economic growth, the resulting cheap cost of borrowing ends "fifty years of perceived wisdom" that companies should not tie up cash in property, said Mr Chris Simmons, founder of Real Estate Forecasting.
There was a fivefold increase in the value of occupier deals in London last year versus in 2011, a tenfold increase in New York and a sevenfold increase in Hong Kong, data produced for Reuters by research company Real Capital Analytics (RCA) showed.
Among companies that have recently bought their own real estate are WPP Group and Google in New York, and Manulife and Hang Seng Bank in Hong Kong, according to RCA data.
Mr Chris Lewis, a real-estate adviser at accountancy firm Deloitte, said: "We are at a moment in time when all the planets are aligned for companies to buy property. The idea is starting to gain traction and you'll see a sustained increase over the next several years."
Cigarette producer British American Tobacco, which bought its headquarters on the north bank of London's River Thames for £190 million (S$374 million) last year, described the deal as "financially attractive".
The rental yield of about 5.5 per cent, or the annual rent as a percentage of the property's value, was more than double its current 10-year corporate bond yield of 2.4 per cent, according to Thomson Reuters data.
In other words, if it funded the purchase by issuing 10-year bonds, the annual interest bill would be less than half the annual rent bill - savings that would come on top of any future rise in the property's value.
Such office deals are "at unprecedented levels" due to cheap loans, as well as the cash many have hoarded in choppy economic times, said Mr Robert Matthews, head of international real estate at Scottish Widows Investment Partnership.
Proposed changes under International Financial Reporting Standards expected in 2016 or 2017 could strengthen the case for ownership. Under the new rules, all outstanding payments over a lease's term must appear on the balance sheet. Currently, only the annual rent goes through the profit-and-loss account.
The appearance of larger liabilities may affect how a company is viewed by lenders and ratings agencies and hurt its ability to borrow, said Mr Michael Evans, a real-estate consultant at Jones Lang LaSalle. Efficient designs, which can save companies millions, are a major selling point of new buildings like Land Securities' Walkie Talkie skyscraper in London.
Mr Lewis said: "Real-estate decisions have become a board-level issue and are no longer the preserve of the property manager.
"Most FTSE 350 companies are taking a long, hard look at their property costs."

SINGAPORE - After decades of renting being the norm, companies with offices in the world's major cities are seeing more financial sense in buying their own buildings, prompted by a mix of cheap debt, stockpiled cash and new accounting rules.

Having culled staff in the wake of the financial crisis, businesses are now scrutinising real-estate costs and capitalising on an opportunity - which has not been present for at least half a century - to cut what is often their second- highest outgoing.

As central banks keep interest rates historically low to kick-start economic growth, the resulting cheap cost of borrowing ends "fifty years of perceived wisdom" that companies should not tie up cash in property, said Mr Chris Simmons, founder of Real Estate Forecasting.

There was a fivefold increase in the value of occupier deals in London last year versus in 2011, a tenfold increase in New York and a sevenfold increase in Hong Kong, data produced for Reuters by research company Real Capital Analytics (RCA) showed.

Among companies that have recently bought their own real estate are WPP Group and Google in New York, and Manulife and Hang Seng Bank in Hong Kong, according to RCA data.

Mr Chris Lewis, a real-estate adviser at accountancy firm Deloitte, said: "We are at a moment in time when all the planets are aligned for companies to buy property. The idea is starting to gain traction and you'll see a sustained increase over the next several years."

Cigarette producer British American Tobacco, which bought its headquarters on the north bank of London's River Thames for £190 million (S$374 million) last year, described the deal as "financially attractive".

The rental yield of about 5.5 per cent, or the annual rent as a percentage of the property's value, was more than double its current 10-year corporate bond yield of 2.4 per cent, according to Thomson Reuters data.

In other words, if it funded the purchase by issuing 10-year bonds, the annual interest bill would be less than half the annual rent bill - savings that would come on top of any future rise in the property's value.

Such office deals are "at unprecedented levels" due to cheap loans, as well as the cash many have hoarded in choppy economic times, said Mr Robert Matthews, head of international real estate at Scottish Widows Investment Partnership.

Proposed changes under International Financial Reporting Standards expected in 2016 or 2017 could strengthen the case for ownership. Under the new rules, all outstanding payments over a lease's term must appear on the balance sheet. Currently, only the annual rent goes through the profit-and-loss account.

The appearance of larger liabilities may affect how a company is viewed by lenders and ratings agencies and hurt its ability to borrow, said Mr Michael Evans, a real-estate consultant at Jones Lang LaSalle. Efficient designs, which can save companies millions, are a major selling point of new buildings like Land Securities' Walkie Talkie skyscraper in London.

Mr Lewis said: "Real-estate decisions have become a board-level issue and are no longer the preserve of the property manager.

"Most FTSE 350 companies are taking a long, hard look at their property costs."


 

 

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