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Supermarket property back in favour with UK institutions

UK institutions doubled their year-on-year investment into supermarket property in 2017 as the sector was the subject of more positive sentiment.

Institutional investment into supermarket property rose from £216m in 2016 to £482m last year – a 123% increase.

The latest Colliers International Supermarket Investment Review reports that a total of £1.42bn of UK supermarket assets were traded in 2017. This represented an 18% year-on-year volume increase and reflected growing confidence in the sector.

Colliers’ Head of Retail Capital markets, James Watson, comments: “Property investors are competing fiercely for assets with long leases and secure income across the sectors.

“The supermarket sector has always featured long leases but the major operational difficulties that it faced in the past three years made UK institutions – traditionally the dominant buyers in the sector – take a standback. They are now emphatically back in the market.”

During 2017, the values of prime supermarket assets increased and average yields sharpened to 4.25%. While UK institutions are the main buyers of prime supermarket assets – where there is a shortage of supply - overseas buyers dominate in the secondary supermarket sector where average yields are around 5.50%.

The report notes: “A lack of prime stock will continue to be an issue, but there should be plenty of secondary product available. As a consequence, more investment will be flowing into the secondary market and it will be interesting to see if this narrows the yield gap between prime and secondary assets to a point which is unrepresentative of their respective strengths”.

From an operational perspective, the supermarket sector still faces major challenges particularly in the area of online fulfilment. James Watson comments: “Getting shopping that has been ordered online delivered to customers remains a major headache for operators.

“Whilst supporting brand loyalty, it is a loss leader for the supermarkets. However, some are now combining the desire to have less sales floorspace with the need for online fulfilment capacity by converting areas of existing stores into pure logistics space.”

In this context, Tesco’s acquisition of Booker - the UK’s largest food wholesale operator - may not be the last of the lateral hook ups between supermarket brands and other businesses.

James Watson comments: “There is definitely more scope to explore how the supermarket business can work with third-party logistics operators for mutual benefit - and this could extend beyond just the existing core relationship of putting food on shelves”.