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Investors eye return to supermarket property market

Oxford Commercial Property Consultancy News

Oxford Commercial Property Consultancy.

Investors eye return to supermarket property market

Amy Williams

In the recent article published by Costar it was announced that investors are re-focusing on the supermarket property market.

The news article said "Property investment in the UK’s supermarket sector is finding favour with investors again after several years of muted activity caused by the end of the so-called space race, changing shopping habits and efforts by the Big Four grocers to bring their costs under control.

The latest Colliers International and MSCI UK Supermarket Investment Report, shows that despite the political events of last year which subdued activity generally, around £1.1bn of supermarket assets were traded in 2016 - a very similar level year-on-year.

Colliers’ Head of Retail Capital Markets, James Watson, said: “In an uncertain world, long-dated income from relatively sound covenants once again looks increasingly attractive to investors. The main structural concern about the current market is supply. Without substantial development programmes and an absence of sale & leasebacks, it will become increasingly difficult to source the best supermarket assets”.

Sale & leasebacks by the Big Four (Tesco, Sainsbury’s, Morrisons and Asda) used to be a major source of asset supply to the market. However, 2016 saw no sale & leaseback activity for the first time since the early 2000s. With operators generally fighting to bring costs under control, it did not make sense to further expose themselves to factors such as inflation over which they have no control.

In contrast, Tesco has become a net buyer of stores as it continues to exercise ‘buy back’ options to mitigate its exposure to property cost. It is estimated that Tesco has spent around £450m on store acquisitions in the past 18 months.

“Taking full control of these assets leaves Tesco free to ‘reboot’ the stores as they wish and align them with their ongoing strategy,” Watson said.

The discount supermarket operators led by Aldi and Lidl have been major disruptors in the sector, with Aldi overtaking Co-op in February to become the UK’s fifth biggest grocer for the first time, according to figures by Kantar Worldpanel.

But there is now some evidence that their extraordinary growth curve is slowing. “In 2014, new Aldi store openings only contributed around 27% to total sales growth, but this figure had risen 83% in 2016. However, if the contribution of new stores is stripped out, year-on-year sales growth for the chain’s existing stores in 2015-2016 falls to less than 2%.

“This slowdown in growth, combined with greater challenges in securing new sites means market share gains for the discounters may begin to plateau. We don’t expect combined discounter market share to exceed 14% in five years’ time.”

The supermarket sector’s property investment market continues to have a definite two-tier structure in terms of yield profile. The average yield for prime assets has remained relatively unmoved at around 4.5% for conventional inflation-linked rent review, long leased supermarkets, while secondary asset yields are around 5.75%-6.25%.

Colliers expect 2017 to be a more positive year for the sector so these may firm slightly over the next 12 months although the prevailing yield gap between prime and secondary assets will remain at around 125 basis points.

Watson said: “The health of the UK supermarket sector is, of course, relative and with margins still under pressure, unprofitable stores will need to be tackled wherever possible as they are negatively impacting bottom lines which remain strained.

“There is a sense though that the sector is entering a calmer period where the major operators have a clearer vision of what their strategy will be. Recent trading figures have been encouraging and all of the Big Four can point to initiatives which improved the bottom line.

“This is further strengthening the property investment case for the sector.”

To read the full article and other commercial property news stories as they happen join Costar here.