Jitters over the performance of Tesco have prompted the break-up of one of the largest portfolio sales in the market.
The supermarket giant, once the darling of the sector, has been subject to warnings of downgrades following the exposure in October of a £260m black hole in its profits.
And the negative publicity has spooked investors, forcing the National Grid Pension Fund to break up its £250m Volt portfolio. The portfolio, put up for sale in October, includes two Tesco supermarkets – in Southwark, SE1, and Enfield, Middlesex – valued at around £100m. While there was strong demand for most of the 12 assets in the portfolio (see below), some investors balked at the supermarkets.
“We liked some of the annuity-grade assets in the portfolio but there is no way we are buying Tesco at the moment,” said a senior fund manager at one of the UK’s largest pension funds.
This week Tesco issued its fifth profit warning of the year, downgrading full-year profits from at least £1.8bn to £1.4bn.
The announcement saw shares plummet by 16% to a 14-year low, wiping £2.2bn off the value of the company, and led credit ratings agencies to further downgrade the world’s second-largest retailer to just one notch above junk.
“I don’t think anyone doubts the covenants,” said one retail property investor, “but lots of UK institutions already have big exposure to Tesco and other big food stores. It is more about liquidity and perception – investors will buy into a business having difficulty only if they can do so more cheaply than a successful one.”
The separation of the Tesco assets from the portfolio is expected to make them more attractive to specialist buyers.
CBRE is advising National Grid Pension Fund on the sale.
HIGH VOLTAGE
The National Grid Pension Fund has already agreed deals for several buildings in the Volt portfolio. Blackrock, advised by Knight Frank, has placed an RAC call centre in Bristol under offer for more than £30m, while seven Premier Inns, valued at £65m, and a £30m Spire private hospital are under offer to UK institutions. Project Volt represents almost a third of the £800m of property owned by the £15.5bn National Grid Pension Fund. Proceeds from the sales will be recycled into higher-yielding assets.
