Sale-Leaseback Real Estate Market Gains Momentum Amid Rising Inflation and Stable Costs

Steadily but not dramatically rising, long-standing inflation is accelerating the development of sale-leaseback real estate transactions. This is one of the safest ways to obtain financing on the market due to its fixed costs, even in a 30-year perspective, regardless of interest rates. With their leap, interest in this topic is growing. The whole of 2024 is likely to end with an increase in the number of transactions by about 8-10% YoY. After the holidays, further recovery is expected, especially at the turn of Q3 and Q4 of this year. Meanwhile, the projected inflation growth for next year allows for even faster development of this market. The following years will also be dynamic, due to the still untapped potential. Stable and credible companies can benefit the most from this.

Ongoing Revival Among Investors

A sale leaseback, often mistakenly referred to as a leaseback, is a form of obtaining financing for business development. The transaction consists of two interconnected stages. In the first step, the property is sold in favor of an investment fund, and then its previous owner, by signing a lease agreement, becomes a tenant, continuing to operate in the same range in the same property.

Investors increasingly realize that the sale-leaseback market during periods of long-standing inflation is one of the best forms of financing. Interest in leasing has exploded in recent years. This is amplified by the growing awareness of the correlation between high inflation and the profitability of leaseback.

High inflation usually goes hand in hand with higher interest rates, which – despite their fall in 2023 – did not deviate significantly from their peak in September 2022. Forecasts for the near future do not predict their quick return to a low level. However, the costs of leasebacks are not directly linked to them and are relatively constant even over 30 years. That’s why this market is seen as stable by investors.

There is probably no other product that would offer such long-term cost stability. This makes leasebacks a safe and stable investment in uncertain times. It eliminates long-term risks, such as potential armed conflicts or the return of the pandemic. After all, inflation fluctuates.

Double-Digit Growth on the Horizon

Forecasting the level of inflation over a longer period is not an easy task. According to economists and NBP projections, the inflation level will not return to the inflation target (2.5% ± 1%) by the end of next year. Moreover, projections for the following years are burdened with greater uncertainty. But one thing is sure: inflation growth will only enhance the attractiveness of leaseback real estate.

For several months, we can observe inflation in Poland once again. In December of this year, it could amount to 5%, and next year – even slightly over 7%. This will encourage investors to increase their interest in leaseback, which has been going on for a long time. After the last full inflation growth readings from GUS in July, as well as after the quick August estimate, further revival can be seen.

Observing the market, we can expect that the leaseback market will continue to grow organically. This year is likely to end with an increase in transactions by about 8-10% YoY. And if the above forecasts for inflation are underestimated, the result may be even better. Observing factors like inflation and other market issues, it’s expected that right after the holidays, the leaseback market will start to accelerate, especially at the turn of Q3 and Q4 of this year.

Of course, a lot will depend on whether nothing extraordinary happens that could shake the entire financial or real estate market. Nevertheless, the most significant growth regarding leasebacks is still ahead of us. The market in this segment develops rapidly in Poland, and foreign investors are increasingly seeing its potential.

Inflation Plays a Big Role

If other sectors will benefit from leasebacks, then the predicted annual increase in transactions will be gradually increasing and noticeably double-digit. During the period of the fastest inflation growth, there was a breakthrough in Poland for this form of financing. Earlier, leasebacks were not provided on such a broad scale in our country.

Typically, inflation doesn’t aid in making groundbreaking business decision. But these times provide the opportunity to resort to unconventional solutions. Investors are increasingly considering leasebacks, and the more investors on the market, the better their offer for entrepreneurs. Interest rates, which should not rise any further, have stabilized investor expectations for the return on real estate investments.

In the period of very low inflation and almost zero interest rates, bank loans may indeed be cheaper. Still, during times of long-standing, elevated inflation, the advantage of leasebacks is clear. When inflation spikes rapidly, it is often too late to make leaseback decisions because investors are afraid of risk and will reflect this in the price. A long-standing high inflation outlook and the prospect of its reopening – as we currently observe – is the best moment for a leaseback.

Only for the Strong

In most sectors that own real estate during times of inflation, benefits from leasebacks are expected. They might be smaller, however, if businesses during periods where variable energy costs have significantly impacted their results, want to take advantage of financing opportunities within leasebacks. Sometimes it’s just too late for that. Such a decision should have been made earlier to protect against a significant increase in financing costs.

Each company is better off making thoughtful decisions rather than rash ones. If its goal is to operate predictably over the long term, then a leaseback in times like now will be an ideal solution.

It’s worth emphasizing that this is a product for companies that make profits and want to continue growing. The investors are entities with a very low risk tolerance, so sectors going through financial difficulties in a given year may not convince anyone to invest in their property.

Catching Up With the Western Market

With increasing interest in leasebacks, more international investors will continue coming into the Polish market who have been practicing this type of activity in Europe or the United States for years. Capital markets are sizable in developed countries. It will only pour more into Poland. This is a self-driving phenomenon.

The more companies that intend to use this form of financing, the greater the number of entities willing to provide such financing. The market will become even more competitive and mature, which has been noticeable for many years in the United States, where over 50% of properties are rented. This is due to the maturity of their capital market.

The leaseback market in Poland is still in the stage of intense development. In Western Europe or the USA, numerous financial sectors have been successfully operating for years. There aren’t as many attractive investment opportunities in Europe as there are in Poland. This is where the intense interest in our country comes from, which has been apparent for several years.

The author of the commentary is Mariusz Stępień, real estate market expert, certified auditor, financial director at INWI