For the headaches that Dave Lewis is likely to have for probably as long as he stays at supermarket giant Tesco, perhaps the market should not begrudge him his £4m golden hello.
Two months into his new role as chief executive and Lewis has had to tell the market that the world’s second-largest retailer overstated its profits by more than £260m, that its bottom- line profits had tumbled by 91% in the six months ended 23 August, and that the Serious Fraud Office is now undertaking a criminal investigation into its accounting practices.
Last week, Lewis and his even more newly installed chief financial officer, Alan Stewart, gave a few scant details on the strategic review that would help not only to rebuild trust in the retailer but also fill the black hole it has unearthed in its accounts.
Among those scant details was a hint that Tesco’s vast property portfolio would have a role to play in bolstering its balance sheet. But some analysts, experts, speculators and landlords think that Tesco’s real estate could cause further headaches for the retailer.
Here, in the first of a series of pieces looking at Tesco and the supermarket sector as a whole, Estate Gazette takes a look at the changing nature of the market and its effect on value.
Tesco values its property portfolio, some 53% of which is freehold, at around £20bn. But not everyone in the market is quite so sure that figure reflects the current nature of the foodstore market.
One analyst said it thought the actual value of Tesco’s estate was closer to £8bn-£10bn, owing to its lack of alternative use and the value of the 1,000 acres of land it owns.
And therein lies the problem. There is just too much supermarket space and not enough demand. Even Tesco itself seems not to want all the supermarkets it is building.
In recent months it has delayed the opening of several shops. In Cambridgeshire, a £22m, 47,000 sq ft supermarket due to open this month will remain closed “until further notice”, while in Immingham, Lincolnshire, tools were downed on a store set to open in September/October.
The supermarket chain that was once criticised for having such aggressive expansion plans and had prompted calls to stop the proliferation of “Tesco towns” put the brakes on its store-opening plans earlier this year. Last week, it announced plans to cut its capital expenditure by around £1bn to “no more than £2.1bn”.
But the space still exists and while there is appetite for foodstore space from discounters such as Lidl and Aldi, they, like the service they provide their customers, will be looking to pay significantly less than Tesco.
Retail agents said Tesco’s portfolio was likely to be valued off a traditional supermarket sale-and-leaseback yield of 4.25% but warned that rents in the sector had likely fallen by 15-20%, with some predicting that the yield needed to soften by as much as 100 basis points.
“There are three things that underpin a sound real estate investment,” said one high-profile retail landlord. “The right sized unit, at the right rent, with the right yield.”
“We all made out like bandits on foodstores 10 years ago,” added another, “but you can’t change market fundamentals. There have to be prospects for rental growth.”
He compared the current state of the supermarket sector with that of the electronics and furniture markets. “Remember what happened with Powerhouse, Miller Brothers, Comet?” said the source.
The nature of the shopper has changed and investors need to catch up with that. Just as consumers now rarely buy electrical goods from a physical store, so too has the tradition of a weekly trip to a supermarket changed. Now, Joe Public shops either online or at convenience stores, nipping to the local Tesco Express, Sainsbury’s Local or Little Waitrose for that evening’s meal.
Retailers are responding, downsizing and changing their expansion plans to focus on smaller stores. But where does that leave the retail landlord?
For Tesco, it puts itself in a bit of a conundrum. In its interim results last week, Lewis intimated that the retailer’s £1.4bn annual rent bill represented a too significant percentage of its cashflow. But any attempt to reduce the level of rent it is willing to pay will have an effect on its portfolio’s valuation, potentially expanding that black hole and definitely causing another headache.
And any fall in the value of Tesco’s assets could have a major impact on its pension scheme, which has already seen its deficit increase from £2.6bn after tax to £3.4bn in the past six months alone.
Could Tesco’s property help it out of its current slump or is it cause for concern? Tweet us your opinion @estatesgazette
