Introduction:
Central banks are anticipated to initiate policy rate cuts by mid-2024, albeit at a more measured pace than the recent rate hikes. These economic shifts set the stage for potential impacts on financial strategies, particularly within the global M&A market and the commercial real estate sector.
The latest projections from the Eurosystem staff indicate a forthcoming shift in the economic dynamics of the Eurozone. Projections suggest a gradual decline in inflation in the coming year. With headline inflation expected to moderate from an average of 5.4% in 2023 to 2.7% in 2024, the economic climate is set for transformation. Despite near-term subdued growth, a potential recovery is anticipated, driven by falling inflation, rising wages, and improved foreign demand.
Sale and Leaseback Transactions in 2024:
Sale and leaseback transactions have gained prominence as a financing strategy especially for middle-market private equity firms and their portfolio companies. The strategy provides companies with a means to unlock meaningful capital tied up in real estate assets, and at an attractive rate, while other sources of financing have stalled. The prospect of lower interest rates throughout Europe bodes well for potential adjustments to the sale and leaseback landscape.
Lower interest rates typically act as a stimulant for real estate transactions. The reduced cost of financing renders transactions more attractive for investors as cheaper acquisition capital becomes available. This brings more buyers out from the sidelines and back to the deal front, creating more competitive bidding processes which drives economics for potential sellers. Lower interest rates over time also tend to bring a decrease in cap rates, thus improving the overall valuation in a sale & leaseback transaction. This also improves the potential multiple arbitrage for sellers contemplating exit strategies as cap rates decrease and arbitrage opportunities become stronger.
As it relates to M&A, in 2023, private equity-led buyout volumes globally declined 38% to $433.6 billion, as financial sponsors cut back on leveraged buyouts and also sold fewer companies. As sale & leaseback financing is frequently used by private equity firms as acquisition financing for M&A transactions, volumes in the sale & leaseback space were down as well, to the tune of around 45%. However, signs of a pick-up in M&A began to show at the end of the year as deal volumes were up 19% year-over-year in the fourth quarter. With global rate cuts expected in 2024 and global private equity funds with trillions in dry powder that needs to be deployed, we expect dealmaking to pick up, and therefore sale & leaseback volume to increase as a result. Additionally, the buyer and seller pricing gap is expected to decrease in the coming year, which should further support an increase in transaction volumes overall.
Variance Among EU Countries:
Due to disparities in market maturity, economic conditions, and regulatory environments, the impact of potentially lower interest rates is anticipated to vary across EU countries. Larger economies with more institutional markets, such as Germany, France, and the United Kingdom, are likely to experience a more pronounced effect. These countries often witness higher volumes of sale and leaseback transactions as well, meaning any shift in interest rates may have a significant influence on the volumes and dynamics of these deals.
Conclusion:
With the anticipation of lower interest rates to come in 2024, sale and leaseback transaction volumes are anticipated to increase as financing costs decline and the global economy recovers from the past year of volatility and uncertainty.