The latest Colliers UK Grocery Real Estate Review reports that last year saw £1.85 billion of supermarket assets change hands. While this was just above the 2020 level but would have been much higher if the supply of assets was more plentiful.
Tom Edson, Colliers’ Head of UK Retail Capital Markets comments: “Given that the sector remains in demand and has been the subject of such concerted buying, it is not immediately apparent where the next tranche of assets for sale will come from.”
The supply profile of assets is also being somewhat improved by the fact that buyers are being less demanding in the criteria that they apply to potential purchases notes the firm.
Tom Edson reports: “Until recently, the bond-like characteristics of supermarket assets let to strong corporate covenants on long-term leases with index-linked upward rent reviews were the sector’s chief attractions.
“Those considerations still apply but the pandemic graphically demonstrated the resilience of the sector and brought a fresh wave of investors – many of whom were switching out of other real estate sectors.
“In the wake of this, what we’re also seeing is that buyers are not focused solely on index-linked assets but will also buy assets let with rent reviews linked to open market rental value and are not ratcheted upwards by the trajectory of the Retail Price Index or Consumer Price Index. This less strict buying approach is making a new segment of assets increasingly sellable.”
In the face of this supply-demand equation, yields across the sector continue to sharpen. Average yields for prime supermarkets reduced from 4.35% in 2020 to 4.25% last year – although the sale of some particularly sought-after assets commanded yields of around 3%-3.5%.
Following their respective acquisition by private equity last year, ASDA and Morrison’s may be a potential source of new asset supply.
Tom Edson observes: “Throughout its history, Morrisons’ freehold estate has been sacrosanct but it remains to be seen how the business’s new owners will view it and whether a programme of selective sales may be a route to recouping some of the corporate acquisition cost.
“However, both businesses will be acutely aware that they do not want to swap a short-term capital gain with an ongoing balance sheet liability. In this context, 2021 saw no store sale-and leaseback activity and – owing to the fiercely competitive market – no opportunity for operators to buy-back properties on which they previously had done sale-and-leaseback deals.”
Although the grocery sector is riding high at present, operators are still looking to ‘rightsize’ their estates in the face of the growth of online grocery shopping and also the legacy of the ‘race for space’ in the Noughties.
Colliers’ Retail Strategy team estimate that by 2030 around 8% of total UK grocery floorspace – which equates to around 12 million sq ft – may be impacted by a need to reconfigure stores to respond to increased levels of online shopping. There is also steady flow of stores and sites which are finding alternative development uses. Given the current demand for new housing, the most prevalent alternative use is residential.
However, demand for grocery-backed assets looks set to remain at very high levels throughout this year.
Tom Edson comments: “The pandemic has provided graphic evidence of the essential nature of the grocery business and investors flocked to buy assets that were increasingly viewed more as core infrastructure rather than simply real estate.
“Buyers face an extremely competitive marketplace and for sellers, there certainly cannot be a much more propitious time to bring assets to the market.”