Kingfisher: right move at the right time

Home improvement retailer Kingfisher is taking advantage of the current buoyancy in the direct property investment market in the UK to sell seven of its B&Q stores and lease them back at long term fixed rates. This should provide the retailer with much needed operational flexibility in the challenging DIY market as well as releasing cash to grow its business at a time when demand is weak.

There is now a rising trend among retailers to offload their property assets while prices are strong - by leasing back they can benefit from locking in rent rates for at least 15 years. This makes sense in the current retail environment; with increased pressure on prices and increasing costs, these deals are not only sensible but necessary as well. This latest deal by Kingfisher is a type that has become popular in retail circles and follows the likes of House of Fraser, Debenhams, Tesco and Austin Reed, which have all engaged in similar arrangements.

Kingfisher has sold seven warehouse stores in total via a subsidiary company, to British Land for GBP198 million. The stores are all freehold and are in prime edge-of-town locations in Ashford, Bury, Exeter, Glasgow, Grimsby, Lincoln and North Shields. The stores are approximately 100,000 sq ft each and represent approximately 7% of B&Q's total freehold and long leasehold portfolio.

B&Q stands to benefit as the leases have been structured to provide significant operational flexibility through assignment, under-letting and alterations. The rent is also payable monthly in advance and will be uplifted annually in line with inflation.

It will also provide stability and certainty of cashflow for B&Q that can be channeled into areas of the business that need it most - either to reduce its debt provision or to fund overseas expansion.

This is a good move for Kingfisher as the DIY market in particular continues to struggle with weak demand, as consumers cut back on spending because of spiraling fuel and household costs. As long as the commercial bubble remains intact, releasing equity from soaring property values can enable retailers to fund various aspects of their business while seeking more flexible long-term rents to mitigate their cost base. It is expected that sale and leasebacks will continue to be a popular move among retailers throughout the course of the year.

Source: Verdict Research