Article

Cushion supply chain costs by turning property into cash

Supply chains are being reshuffled more often due to the rapidly changing world. That opens up opportunities for smart real estate strategies.

February 04, 2020

It is a turbulent time for logistics specialists. Never before have companies had to realign supply chains and thus real estate locations so frequently. Finance is thus becoming an increasingly important part of supply chain management (SCM).

Highly volatile market conditions have put supply chains under relentless pressure. Between American punitive tariffs, Brexit, increasing e-commerce, production sites being moved, rising sustainability demands or changing customer expectations, today’s procurement and delivery chains require reorganising at ever shorter intervals.

And this is a worry for logisticians: “We’re behind the times with one central location in middle Germany. What we really need are five to six regional distribution centres. But where are we supposed to get the funds to pay for them?” This situation, or one very similar to it looms large for many German or European companies.

Sale and lease back arrangements create breathing room for the supply chain

Current properties, whether leased or owned, play a big role in any supply chain realignment as they generally represent a large amount of tied-up capital. However, they also constitute an opportunity to finance new logistics sites.

One way to generate money from existing properties is to sell them. In today’s real estate market, it is often more lucrative to sell unused land and buildings than many owners realise. However, not all supply chain changes require companies to abandon long-established sites. In this case, companies with their own properties can still capitalise on the ongoing real estate boom through sale and lease back arrangements. Essentially, the company sells a property but rents it back under a long-term lease. This frees up capital that can be invested in new locations. Sale and lease back approaches can be used at these new sites, too, by tendering bids from investors to develop and lease out the property. The result: a custom property tailored to the occupier’s needs.

Either way, the final decision will depend on factors, such as the investor suitability, or the property’s versatility and ability to pass audits. Sale and lease back arrangements offer a way for companies to lower and make their fixed costs more varied as well as significantly improve their balance sheets over the long term.

Location flexibility becomes even more vital

In short, there are good reasons to combine these considerations with supply chain network analyses and include options for extracting value from redundant locations. However, even a completed centre-of-gravity analysis can be assessed for additional opportunities to convert underused capital into cash. “We understand the power of combining network and capital market analyses,” says Werner Gliem, Senior Team Leader Supply Chain & Logistics Solutions at JLL. “Generally, though, it is safe to assume that even a singular analysis of the options of varying assets will provide more room for manoeuvre.”

This kind of extensive analysis can help more than just real estate-owning companies. Tenants investigating new possible locations can benefit from going beyond a simple cost comparison and considering all the advantages currently available in the capital market – whether regarding new leases or determining whether it might make more sense to buy the property outright.

Either way, flexibility is the name of the game in today’s logistics industry. Faster, more effective responses to changing market conditions represent a towering competitive advantage. After all, the pace of change is not going to get any slower.

Werner Gliem
Senior Team Leader Supply Chain & Logistics Solutions