Matthew Hobbs, head of the UK Retail Lease Advisory, explains why the role of a supermarket specialist requires not only property knowledge but also the skills of a behavioural scientist.
In what way is the supermarket sector different to other retail assets?
The investment market for the sector is extremely strong – and has been largely insulated from the turbulence in the retail market as a whole. In many cases, the rents payable on supermarkets were agreed many years ago and have been the subject of index linked rent reviews ever since. The sector has evolved and the passing rents may therefore bear little resemblance to the open market values. Direct transactional evidence is rare, so an enormous amount of experience and skill goes into assessing the true underlying rental value of an asset.
At the same time, there are only a handful of supermarket operators and their popularity with investors waxes and wanes. Factors such as supply (of product, as well as supply of a operators with good covenant), the effect of individual operators’ performance as well as corporate activity all impact their attractiveness. The recent acquisition of Asda by EG Group/TDR appears to be having a material effect on their perceived covenant – and the same could apply in the case of the acquisition of Morrisons by American private equity group CD&R.
What does a supermarket specialist need to keep in mind when they advise their clients on a particular store?
Being a chartered surveyor alone is not enough. You must be able to combine property skills with those possessed by an accountant, an analyst and sometimes a behavioural psychologist. This will include in-depth knowledge and understanding of the sector, the investment market, the asset itself and its location. Knowing how supermarket businesses operate and how customers behave is key. As is having on-the-ground knowledge of the operators’ property requirements and extensive knowledge of current transactions.
What is the process of advising on the value of a supermarket?
The issues can be broken down into location factors, physical attributes and lease assumptions.
Location factors: Supermarkets thrive on being the dominant store in an easily accessible, densely populated area without excessive competition from other food stores. This is relevant for both online fulfilment and physical shopping, as supermarket operators tend to achieve their highest internet sales closest to their largest destination stores. Accordingly, the key drivers of value revolve around the size and demographic profile of the population, competing food stores and local issues such as prominence and ease of access for customers.
Physical attributes: Size is critical, as the hottest part of the sector is the discounters. Their size requirements have been growing such that they will now occupy up to 25,000 sq ft. They will also take larger stores of up to 35,000 sq ft in higher value, urban areas where representation is difficult to find and parts of the property can be sub-let to gyms or DIY retailers etc. At the larger end of the scale, with margins on non-food goods being eroded by the internet, the Big 4 supermarket operators have had to find alternative uses for parts of their largest stores by retail concessions. There is therefore a sweet spot for the size of the store which will vary depending on the location factors.
Other physical factors include the quality of car parking, ability to provide dedicated click and collect areas, ease of internet fulfilment, loading, layout and other characteristics such as orientation of the sales area to the car park, ceiling height and so on.
Lease terms: These cover a wide range of issues, including and not limited to, lease length, rent review, alienation, AGA provisions, buy-back clauses, options to renew, property swap clauses, sale restrictions, service charge liabilities and pre-emption rights.
About the author:
Matthew Hobbs is a Fellow of the RICS and leads the Retail Lease Advisory team, he has more than 30 years of experience in negotiations and investment due diligence. Working together, with the Capital Markets, Valuation and Agency teams they specialises in investment disposals and acquisitions, site identification and acquisitions, valuations, rent reviews, lease renewals and lease restructuring work in the supermarket sector.
To contact Matthew, email Matthew.Hobbs@colliers.com