Pointing to the global trend of banks selling real estate that once housed their operations and then becoming tenants in the same buildings, CEO of Kingston Properties Ltd (KPREIT) Kevin Richards says it’s only a matter of time before all local players go that route.
It’s called sale and leaseback and it’s now a major plank in KPREIT’s strategy.
“If you look at the US, for example, most of the banks and institutions don’t own their real estate,” Richards told the Jamaica Observer on the sidelines of the recently staged International Real Estate Conference and Home Expo in Montego Bay.
He cited Scotiabank’s sale of the building that houses its headquarters in Toronto.
“Scotiabank of Canada doesn’t own any property. It’s all leased. And [this also applies to] most of the financial institutions around the world,” Richards said.
“In Jamaica the banks are shifting now. NCB had packaged a bunch of their real estate and put it into a fund and marketed it to their customers; we saw last year where JN sold their real estate to another fund. I don’t think Scotia owns a lot of real estate. CIBC also doesn’t own a lot, if any at all. And the others will have to adapt at some point,” he added.
KPREIT did its first sale and leaseback deal in 2011 and Richards is convinced there are still a lot of these opportunities available locally, across a wide range of sectors and industries.
“I’m very big on sale and leaseback arrangements,” he told the Observer.
During a presentation on ‘Exploring Opportunities in Commercial Real Estate’ he had described it as “the biggest opportunity… in the commercial real estate space in Jamaica” right now.
“[Locally] we have been a little slow to adapt, but it is a trend that we’re now seeing develop,” Richards noted.
He stressed that the company that sells its building and enters into a lease agreement with KPREIT doesn’t even have to move out.
“A lot of people hold real estate because they’re scared of losing tenure and they think that owning real estate protects them from that. But you can structure a lease for however long — 20 years — and have all the clauses in there to ensure that you stay in the space without any loss of tenure,” he assured.
He pointed to other advantages.
“Usually those businesses have a higher return on capital than real estate. So they could expand into multiple locations, go into a new product line, acquire a competitor; they could do so many things with the funds from the sale,” Richards said of the benefits for the seller.
For one of its first sale and leaseback deals, KPREIT bought a building that a company in the manufacturing sector had owned for 15 years.
“It had become a staple of their business; you’d recognise that building every time you drive by it. But they realised that it’s better to take that equity out of real estate and put it into their business. That has been a successful transaction for both of us, because they got capital to put in their business and we got property at a prime location. We replicated that and we will continue to replicate that,” Richards said.
He also sees potential opportunities in adaptive reuse — the conversion of office space into residential. It became popular in major cities abroad during the COVID-19 pandemic as companies scaled back operations. While it did not take off on a large scale because of the costs involved and KPREIT has not yet made it a major area of focus, Richards still thinks adaptive reuse is something worth exploring locally. He suggested that a mix of ground floor retail and top floor residential space could work for some of the older and smaller office buildings in downtown Kingston.
He also pointed to potential opportunities arising from a lack of inventory in the warehousing segment of the market. Additionally, he also foresees strong local demand for retail space, despite a trend in the opposite direction in the US. He attributes this to the local demand for face-to-face engagement with clients.
“When people hear the term retail they think of clothing, mainly. But what is of greater demand is what I call personal care services. These are your gyms, your spas, your beauticians. Those are customer-facing retail. You can’t do that online. Anything in the personal care service is going to continue to lead to a strong demand for retail, so there is still some opportunity there,” Richards predicted.
This preference for human interaction is also impacting the robust demand for office space locally, again bucking the trend seen in some other countries.
“Jamaicans prefer to be in the office, and the trend now is that a number of companies that have office space, they’re looking to consolidate in one location. That helps to build morale of the team, because everybody socialises in the same space,” said Richards.
He has, however, noticed a change in the type of office space needed locally and abroad, with a shift from Class B into Class A.
Class A buildings are usually in good, easily accessible locations and are professionally managed. These factors help them attract the highest quality tenants and also command the highest rents. Class B buildings are generally a little older, but still have good quality management and tenants.
“Offices are now more of a collaborative space. It’s not just about a desk and a chair and a phone,” said Richards.
“[Today] you have to have more space where you can actually communicate and engage; those are things that have proven to boost productivity. Offices are designed different from how they were designed 20 or 30 years ago. So I still think that there’s strong demand for office space, but primarily, Class A office space,” he added.
