Benefits of sale-leasebacks in Vietnam industrial marketing

Boustead Projects Co., Ltd. has reached an agreement to buy 49% of the shares in KTG & Boustead Logistics Industry Joint Stock Company in Yen Phong industrial park for about $6.9 million. Photo Yen Phong industrial park

Sale-leaseback is a very particular form of a financial instrument where one party (the seller/future lessee) that owns an asset sells the asset to the second party (the investor/future lessor). Then, the seller leases the asset back from the buyer, therefore the seller becomes the tenant, and the investor is the landlord.

Benefits for the seller/future lessee include leveraging their real estate assets to raising capital instead of taking out a high-interest loan from the bank. Furthermore, they are selling the asset at the current market rate, which is likely to be higher than its initial purchase cost. Entering a lease with a new landlord also gives them a chance re-negotiate any terms they wish.

Benefits for the investor/future landlord include acquiring an operating asset that produces an instant return on investment in the form of monthly rental payments. Therefore, built-in tenancy’ ensures they do not need to spend cash on leasing or marketing campaigns to source potential tenants. Predicable and secure cash flow and a satisfactory yield over a relatively long lease term (usually 10 years) provide comfort for the investor/new landlord.

John Campbell, Manager, Industrial Services, Savills Vietnam 

Although increasing in popularity, sale-leasebacks are still underutilized in Vietnam. There is no shortage of investors seeking to purchase operating assets and undertake sale-leasebacks in Vietnam’s industrial sector. However, investors often find it difficult to identify suitable occupiers, since many of manufacturing and logistics occupiers are not even aware of a sale-leaseback as a financing alternative.

However, some international and even local players are starting to pave the way. The first high-profile sale-leaseback in Vietnam’s industrial market was DKSH’s warehouse in Binh Duong in 2017. In 2018, Mapletree Logistics Trust from Singapore invested US$43 million in Unilever’s 66,800 GFA warehouse in Binh Duong. The property was leased back to Unilever on 10-year term, providing a net initial yield of 8.3% for Mapletree. In 2020, Savills Vietnam brokered a successful sale-leaseback of 36,000 m2 GFA of warehouse space in Di An, Binh Duong. Savills represented the buyer, and the property was purchase for over US$20 million and leased back to the tenant on 5 5-year lease term and providing a yield of over 9% for the investor.

The pandemic will encourage more occupiers to consider what financing options are available to them, and hopefully help them understand the benefits of leveraging their real estate assets as a means to raise capital.

There are a number of important factors to consider in undertaking a sale-leaseback. Firstly, it’s important to understand that its effectively two transactions and there can be a lot of paperwork and time involved. The first transaction is the sale or purchase of the asset. Once both parties sign a Sale-Purchase Agreement (SPA) to close the purchase, they must then also sign a Lease Contract. The SPA and Lease Contract are tightly connected, as the selling price stated in the SPA must enable the investor to achieve an attractive yield against the monthly rental rates out lined in the Lease Contract.

As a basic example, if an investor buys a 30,000 m2 warehouse at US$18 million and leases it back to the previous owner/tenant at US$4.5/m2/month, a net initial yield (NIY) of 9% is attainable in the first year.

Due to the time and number of agreements to be negotiated and signed, it is advised that a professional real estate agency is used to assist both parties with the transaction, preferably an agency with experience successful closing sale-leaseback transactions. The agent can help determine if the selling price is in-line with the current market. The agent will also play a crucial role in drafting the new Lease Contract and will need to ensure all terms and yearly rental increases are reasonable and in accordance with the market. Furthermore, these terms will need to be suitable for the Lessee and provide the investor or Lessor with a satisfactory investment yield. One further consideration is to ensue the master land industrial zone landlord or IP is aware of and approves the project. Given the IP will be the landowner and master landlord of the new investor, they must confirm that said investor meets the criteria of their IP.