Sale-and-leaseback deals are set to drive supermarket investment this year as operators look to tackle their debt, according to the latest report from Colliers.
The agent found that the grocery sector posted a record high of £2.3bn for investment transactions in 2023.
Sale and leasebacks accounted for 43% of activity, underpinned by grocers’ efforts to reduce debt as well as generate funding for turnaround plans. Colliers noted that the “traditional dominance” of institutions and property companies has fallen away.
Average prime yields for index-linked assets amounted to around 6%. Researchers predicted that the expected drop in Bank of England base rates in Q3 this year will create a sharpening of yields and an associated boost for values.
Pierre Kunkler, retail capital markets at Colliers, said: “The continued dominance of sale-and-leaseback transactions that we expect to see this year goes hand in hand with investors’ increasing scrutiny of the covenant strength of major operators and the impact of their corporate finance structure.
“The well-known debt positions of Asda and Morrisons has meant that Tesco and Sainsbury’s are viewed more positively, and this is being reflected in a significant yield differential in transactions between the two groups of operators.”
Meanwhile rental growth for supermarkets exceeding a size range of 15,000 to 25,000 sq ft has been stagnant, said Colliers.
Rental values for prime supermarkets have declined by 15% from the height of the market in 2012. Researchers said that where rents were agreed around that year, the underlying rental value of large prime stores and the degree of over-renting remains “uncertain”.
Occupier-wise, Tesco and Sainsbury’s was found to have either maintained or grown its market share, while Asda and Morrisons have struggled with declining market share. Aldi and Lidl have stuck to their “aggressive” expansion strategies, with Lidl focusing on select opportunities in London and the South East and Aldi aiming for 50 new stores annually.
The report noted that higher interest and increased construction and labour costs have frustrated the development plans of many of the supermarket operators.
Greg Styles, head of retail development and advisory, said: “The relative levels of market share for the operators of the larger format supermarkets has remained relatively stable, but there is now a real variance between their financial models and therefore their ability to compete and grow.
“For all of the acquisitive supermarket operators, the ideal target store size falls in the 15,000 to 25,000 sq ft bracket, meaning that competition for sites remains high. While in the near future it looks likely there will be good news with a fall in interest rates, with construction costs likely to remain close to current increased levels, other levers need to be moved to restore developments to viability.”
Matthew Hobbs, head of retail lease advisory, said: “Due to the operators’ focus on their own estates in recent years, particularly in the face of the rapid expansions of Aldi and Lidl, there have been very few new large supermarket lettings and consequently no open market rental evidence.
“Happily, this situation is now changing as leases on some prime stores begin to expire without the landlords and tenants agreeing a lease extension in advance. The availability of arm’s length rental evidence will allow investors and supermarket operators to value their assets with more certainty – and the rental/ marriage value calculations involved in restructuring leases can be conducted with greater clarity.”
Photo by Jochen Tack/imageBROKER/Shutterstock
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