Tu Luong, BW Director – Business Development and Host Nhi A.N at BW Expert Talk Series Eps 2
[5 min read]
This short Q&A with Ms. Tu Luong, Director of Business Development at BW, sheds light on the current state of sales and leaseback of a factory or warehouse. She discusses why these transactions are not very common in Vietnam and what factors to consider to maintain their success for the future.
What is a sales and leaseback transaction?
A sales and leaseback transaction is where the owner of an asset, like a factory or warehouse, will sell it to a buyer or a developer like BW. The former owner will then immediately assign a long-term lease agreement to leaseback the facility from the buyer in order to ensure the operation stability.
What are the advantages of these transactions?
The seller benefits from acquiring cash without having to relocate or interrupt running their firm. In addition, they are selling the asset at the current market price, which is likely to be more than what they initially paid for it.
Whereas, the investor benefits from acquiring an operating asset that generates a monthly.
What is the current demand for this type of transaction in Vietnam?
In developed markets, like the US or Europe, there are many similar transactions. Businesses in those markets care more about capital efficiency, which adopt asset-light models, instead of physically owning the assets.
In Vietnam, businesses are still heavily influenced by the Asian concept, where a company links the fact of owning the land and facilities with business stability. Thus, this kind of transaction has not been popular in Vietnam.
However, some international and even local players are starting to pave the way for sales and leaseback. In 2020, BW Industrial acquired a warehouse from Gemadept Logistics of 10,000 sqm GFA of warehouse in Binh Duong under a sales & leaseback structure.
Why is the warehouse model more popular than factory in sales and leaseback transactions?
It is due to the general specifications between the warehouse and the factories. A majority of warehouses on the market are for storage, thus the specifications in general are quite standardized. If a tenant moves out, the seller can find a new one easily.
The specifications for factories are quite different from each other and depend on the specific designs and standards for an industry. Therefore, the seller needs to care more about capital expenditure to use towards maintenance or ratifications.
What are the key factors for a company to take into account when dealing with a sales and leaseback transaction?
There are three main factors to consider:
First, the facility specifications and the quality of buildings: An experienced developer always prepares for the worst-case scenario. When the existing tenant walks away, they need to still be able to lease the facility to other tenants, therefore, technical due diligence is essential. Developers should check on the design, specifications, structure, and conditions of the facilities to evaluate its build and maintenance for continued use over the next 20 or 30 years.
Second, the price: In a sale at leaseback, the seller wants to sell the asset at the highest price, and then lease the facility at the lowest rent as possible. The buyer will have a required rate of return internally. In doing a deal, they have to meet certain returns, thus, both sides have to work together on a win-win basis.
Finally, the ownership and the deal structure: In Vietnam, foreign buyers cannot acquire assets directly, so they buy shares in the company which owns the asset. However, a buyer will have to consider the capital, cash flow, tax development risk, and licensing before moving forward with a sales and leaseback structure.