Companies ditch renting to cut property costs

Fri Jun 21, 2013 7:41am EDT
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By Tom Bill

LONDON (Reuters) - 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 scrutinizing real estate costs and capitalizing on an opportunity not 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 kickstart economic growth, the resulting cheap cost of borrowing ends "fifty years of perceived wisdom" that companies shouldn't tie up cash in property, said Chris Simmons, founder of Real Estate Forecasting.

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

Among companies that have recently bought their own real estate are WPP Group (WPP.L: Quote) and Google (GOOG.O: Quote) in New York and Manulife (MFC.TO: Quote) and Hang Seng Bank (0011.HK: Quote) in Hong Kong, according to RCA data.

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

Cigarette producer British American Tobacco (BATS.L: Quote), which bought its headquarters on the north bank of London's River Thames for 190 million pounds ($298 million) last year, described the deal as "financially attractive".

The rental yield of about 5.5 percent, or the annual rent as a percentage of the property's value, was more than double its current ten-year corporate bond yield of 2.4 percent, according to Thomson Reuters (TRI.TO: Quote) data.   Continued...

The Canary Wharf financial district is seen in east London February 28, 2013. REUTERS/Stefan Wermuth