UK supermarket investment sector sees more activity

Following the disruption of retail capital markets throughout last year, investment into UK grocery-backed assets – which had dipped sharply in 2022 – is now showing some evidence of a cautious rebound.

According to specialist retail consultancy, Font Real Estate, investor appetite for the sector still remains measured, but the first quarter of this year saw around £330m of deals on larger format stores. This figure does not include the £431m sale of assets within the Supermarket REIT and Sainsbury’s joint venture, but was still more than the total transacted during the whole of Q1-Q3 last year. Average yields on transactions in Q1 of this year were around 5.90%.

Tom Edson of Font Real Estate comments: “We’re now seeing increased stabilisation across the sector, and this is bringing some investors back into the market – although concerns around increased borrowing costs and where inflation is headed remain material considerations.

“However, we can see that some confidence has returned and investment transactions have responded accordingly. We’re not predicting a return to the levels achieved in 2020-2021 which saw annual deal volumes of above £1.8bn, but with pricing discovery now being reflected in increased transactional volumes, this upturn is welcome following a very challenging 2022.

“What is also evident is that the pricing expectations of purchasers looking to acquire Asda or Morrisons stores is lower than that on Tesco or Sainsbury’s primarily due to the new ownership structures of the former.”

“Over the longer-term, grocery-backed assets have a track record of being resilient even in times of economic stress. This was demonstrated most recently during the pandemic, and we would expect that a sector – which offers long income on large urban sites and serve a non-discretionary use – will once again be the preferred choice for many investors.”

Examples of Q1 2023 UK grocery-backed investment transactions

  • Project M4: acquisition of four Morrisons stores by Pimco from M&G for £110m
  • Asda, Hayes: acquisition by Aviva from British Steel Pension fund for £31m
  • Morrisons, Plymouth: sale & leaseback acquisition by Fiera Capital for £18m