Net lease capital flows

The concept of the sale and leaseback originated in the US and continues to be dominated by capital from this jurisdiction. Its use has spread globally over the last few decades but the US market has led the world in turning this structure into a distinct institutional asset class. The ‘Net Lease’ market is named after the lease structure investors require, a ‘Triple Net Lease’, which results in all property related costs (namely tax, insurance and maintenance) being borne by the tenant. The US market continues to dominate in scale and liquidity but many US investors have turned to Europe over the last decade to source additional investment opportunities. Investor demand and the increased use of this structure by both PE Sponsors and corporates is driving the market in Europe.

Brief history of the Net Lease market

The Net Lease market took shape from the 1960s–70s onward, as retailers and then industrial operators began selling their real estate to unlock capital while continuing to occupy it under long-term leases. The asset class matured significantly in the 1990s and 2000s with the rise of dedicated net lease REITs (Realty Income, National Retail Properties, W. P. Carey among some of the first), which gave the strategy public market scale, liquidity, and a track record that made it a recognised institutional asset class.

In the US, this depth was helped by structural factors: a large, fragmented corporate landscape, a tax and legal environment well-suited to long leases and investor familiarity with the model after decades of REIT issuance. Net Lease became a mainstream way to finance all property types from drugstores and restaurants to industrial and logistics assets. The market is characterised today by a deep pool of both public and private capital chasing the space.

Europe and the rest of the world have followed but with a lag and a different starting point. Sale and leaseback and long income property investing existed in Europe well before the 2010s. However, it lacks the same scale, standardisation, and REIT-driven liquidity that the US has built up. Over the last decade, the strategy has gained real traction. Many US investors have turned to Europe to source more stock and investment opportunities in a historically less crowded market.

The market remains less mature than the US and faces structural challenges, primarily the variation in lease law and landlord/tenant practice across jurisdictions. However, the direction of travel and momentum continues to build for the Net Lease sector in Europe. This is evidenced by recent fundraising including Blue Owl’s debut European fund closing at €1.6bn and LCN’s European Fund III closing at €600m.

Where is the Capital coming from now?

Based on Capcore’s own engagement with active sale and leaseback investors in the European market, we estimate that 53% are North American in origin, 33% European, and 14% are from the rest of the world. These figures are estimates of the number of different parties operating in the sector.

Whilst the number of European investors has grown over the last few years, investors which originated in North America still make up the largest share of the market. If we were to look at total capital deployed, we would expect to skew even more in favour of the US.

What This Means for a Transaction

Investors with origins in the US tend to be larger with existing portfolios of significant scale in North America. Most deploy across the whole of Europe including Central and Eastern Rurope (CEE) and are dedicated to Net Lease investments. Their systems and processes are often highly efficient, built on decades of prior experience in the US. This supports speed and consistency across portfolio or multi-jurisdiction deals. Most have teams in Europe, typically based out of London, but with underwriting functions and investment committee signs offs back at home.

They can be more restricted on opportunity size – both in terms of lot size (most will not consider opportunities which are below €15m) but also based on the scale of the underlying business.

European capital is more diverse than its US counterparts which makes their requirements and characteristics harder to summarise. The investors include family offices, real estate funds, long income vehicles such as French SCPIs and several dedicated Net Lease funds.

Many have more targeted geographic requirements and have local teams in their priority markets. These investors are more likely to be able to underwrite smaller opportunities.

Origin can also carry pricing implications. A dollar-denominated investor underwriting sterling or euro rent needs to consider currency/hedging whereas a domestic buyer will not. Some of the American investors have raised European funds which are denominated in Euros given the scale of the opportunity they see in Europe.

Capcore have produced a deep dive into the profile of Net Lease buyers which can be found alongside this article in our Property Insights section of the website.

The Final Word

The European market lags the US market and faces structural challenges in its growth trajectory. However, the pace of growth in recent years cannot be overlooked. An increasing number of investors are seeking to enter the market and those already active in the space have raised capital at record-breaking levels for this sector in Europe. Capital needs to be deployed and this backdrop presents a competitive landscape to execute sale and leasebacks.