Supermarket yields are likely to sharpen towards the end of next year, according to new research.
In its latest UK Supermarket Investment Update, specialist retail consultancy Font Real Estate said a more attractive debt market, coupled with continued demand in the sector, could see yields tighten following a series of sale-and-leasebacks this year which drove investment volumes to record levels.
The report said: “Buyer demand will be sustained and, if prevailing economic conditions are positive, we may even see a hardening of prime supermarket yields towards the end of the coming year”.
But the rising tide will not lift all boats. The report said pricing is “more of an asset-by-asset evaluation than ever before”.
“It is the underlying covenant of the occupier which perhaps has the strongest influence on investor sentiment, with potential buyers increasingly discriminating about relative covenant strengths – especially with regard to the debt profile of Asda and Morrisons.”
Font gave the example of stores sold during the recent Morrisons sale-and-leaseback deals. Stores with Morrisons taking a 25-year RPI-linked lease commanded a yield of 6.75%. “Five years ago, that yield would have been around 4.25%.”
Rental levels are also undergoing a period of adjustment, with some supermarkets sold during the first wave of sale-and-leasebacks three years ago now commanding 50% more than open-market rents due to index-linked rent reviews. Font said rents of £30-£35 per sq ft were not uncommon.
Operators have proven willing to re-gear to secure rents more in line with the market.
Font’s Tom Edson said: “Lease re-gears have provided some clarity on rental levels, and operators are invariably happy to agree lease extensions with lower rents on their top performing stores but are taking a more cautious approach when it comes to their weaker assets. In return, landlords are getting robust covenants and index-linked leases with appropriate caps and collars.
“Over-rented assets are still selling but it takes a buyer with a particular strategy to navigate their way through the present rental disparities.”
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