The property investment market which underlies the UK supermarket sector has ‘re-booted’ following the turbulence that affected the big operators last year.
Despite the difficulties that the ‘Big Four’ supermarket operators (Tesco, Sainsbury’s, Morrisons and Asda) experienced in 2014, property investors still bought £1.3bn of supermarket property assets which provided an average total return of 7%.
According to the latest MSCI/Colliers International UK Supermarket Investment Report, in the face of operator profit warnings, curtailed expansion programmes and fierce competition from discount retailers, the supermarket property investment sector has developed clearly defined primary and secondary asset markets and this is providing opportunities for a broadening base of investors.
Colliers International Head of UK Retail Investment, James Watson, comments: “The sector has, in effect, re-booted itself without losing its overall momentum.
“Operator difficulties are being offset by an improving economic situation and a more constrained supply of new supermarket assets.
“However, there is now a more clearly defined primary and secondary market for assets.
“Yields for the prime stores let to on RPI-linked leases will hold firm. But returns for stores let on open market rental leases are being affected and the secondary market has more pain to come.
“The current average yield gap between prime and secondary assets is simply not wide enough to reflect the inherent risk profiles of these assets so we will see further pricing adjustments this year.”
The research analyses the performance of £6.8bn of supermarket assets and shows that in 2014 there was average rental growth of 0.3%.
MSCI Senior Associate, Colm Lauder, comments: “Supermarkets’ stronger lease profile and inflation-linked rent reviews have produced a cyclical performance profile with higher peaks during recovery periods and smaller troughs in downturns.
“Over the longer term, this has helped supermarket returns to outpace other retail property types, an advantage that was most pronounced during the recent global downturn. Despite deteriorating trading conditions for many occupiers, supermarkets remained strong, recording a more robust total return and crucially avoiding rental value declines.”
Although the ‘Big Four’ operators have largely curtailed their store expansion programmes, there is still around 3.9m sq ft of new supermarket space in the development pipeline.
However, it is Aldi – one of the new discount operators in the sector - which has the largest 2015 development pipeline at more than 1m sq ft.