October 10, 2003—Leasing property rather than owning it allows companies to produce a better operating performance. That is the conclusion of extensive research covering experience over the past decade.
The investigation, undertaken for property consultancy Donaldsons by Professor Meziane Lasfer of Cass Business School in London, looked at more than 5000 firms over the period 1989-2002.
The results showed that companies that lease all their property have 20% less debt, 25% more cash and hold 40% less inventory as a proportion of their assets than companies that own all their property.
Commenting on this outcome, Keith Martin, head of the corporate division at Donaldsons said: “Leased property is treated as an expense—it impacts the bottom line. So companies try to wring maximum efficiencies from it to justify that expense. All too often property owned by a company is just taken for granted, as a free good.”
The research found that leasing rather than owning a property releases cash that can be used to invest or pay off debts. Leasing companies generally have lower short term and secured debt; they also hold larger proportional amounts of cash.
Leasing is also positively related to a companys growth. For example, the average growth rate in turnover increased from 1.2% for companies with 0% leasing to 2.4% for companies with 100% leasing over the study period.
Notes Keith Martin: “The lesson that can be drawn from the Cass Business School research is that the question of whether to own or rent property should heavily influence the way companies are funded. That leasing can have such a profound and demonstrable effect on so many key financial drivers is striking. Professor Lasfers work raises conclusions that should bring property to the fore for all Finance Directors and CFOs.”
The Donaldsons research revealed a significant shift away from companies owning their own property. The level of property held by UK listed companies through operating leases has doubled over the last decade to 68bn last year from 34bn in 1991. The number of companies that leased all of their property grew from 20% in 1991 to 38% in 2001.
Martin concludes: “Companies that have not followed this shift towards leasing really should re-examine their position and their motives.”
—Elliott Chase
Reprinted with permission; copyright 2003 i-FM
