After a period in which the
UK supermarket property investment market reflected the problems of the
sector’s major operators, it has now recovered some ground and is proving increasingly
popular with investors.
The latest global real
estate advisor, Colliers International, and MSCI UK Supermarket
Investment Report, says that despite the events of last year which muted
property investment 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, comments: “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
Sale & leasebacks by the
Big Four operators (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.
James Watson comments:
“Taking full control of these assets leaves Tesco free to ‘reboot’ the stores
as they wish and align them with their ongoing strategy”.
The discount supermarket
operators led by Aldi and Lidl have been major disruptors in the sector but
there is now some evidence that their extraordinary growth curve is slowing.
Watson comments: “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.
James Watson comments: “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
“This is further
strengthening the property investment case for the sector.”