Improved financial performance by the UK’s major grocery operators has triggered concerted buying of supermarket property investments.
According to research by property consultants, Colliers International, £1.78bn of grocery property assets changed hands in 2019 – 80% up on volumes in the previous year.
Colliers’ Head of Retail Capital Markets, Tom Edson said, “Despite the economic uncertainty of last year, there was generally improved trading performance by the major operators, a trend which was underlined when the rating agency, Moody’s, moved Tesco back to an investment grade rating in July.
“High levels of employment and progressive wage growth has maintained spending both in-store and online while the operators have continued to ‘rightsize’ their property portfolios.
“Investors looking for property assets which offer solid returns underpinned by solid corporate covenants targeted the sector and took buying to levels that haven’t been seen since 2013. We have now seen capital market volumes in the sector of more than £1bn annually for the past decade. During a period when UK retailing – and the property market it supports has continued to be the subject of negative sentiment, the grocery sector has been the stand-out performer.”
The latest Colliers’ UK Grocery Real Estate Review reports that the average return from a supermarket property investment achieved during 2019 was 5.1% net initial yield. Investors are attracted to the assets because most leases stipulate rental increases in line with the Retail Price Index. However, this has proved problematic for the operators as it has driven rents to well above their open market value. This means that the ‘Big Four’, Tesco, Sainsbury’s, ASDA and Morrisons – have, in effect, been paying too much for their store networks.
This situation particularly brought into focus the cost of the largest supermarkets which were thought to be not fit-for-purpose especially with the rise of online food shopping. However, there is now a move towards using stores for the fulfilment of online orders as well as ‘real life’ trading. This has made larger stores of 90,000 sq ft-plus more viable as they can accommodate a conventional trading area together with a ‘dark store’ which serves internet orders.
Edson added, “This year will see a continuation of the ‘Big Four’ trying to right-size their portfolios while the discounters, Aldi and Lidl, will try to gain further market share through aggressive store expansion strategies. Primarily through new store openings, Aldi inched closer to major operator status in 2019, and is now the UK’s fifth largest grocer behind Morrisons. 2020 will also see the launch of M&S’s £750m joint online food delivery venture with Ocado, a significant change for the retailer.
“The past year has seen the blocking of the Sainsbury’s-ASDA merger and the announcement of the future departure of CEOs at Tesco and Sainsbury’s. The market is waiting to see what will happen with ASDA – which is widely thought to be up for sale – and, of course, Brexit is expected to have an impact on food costs and therefore on the shelf price of supermarket goods.
“It looks like 2020 will play a big part in shaping the future direction of the UK grocery sector.”