The troubles facing the “Big Four” supermarket chains in the UK have been well documented for some time, with the influx of discount competition and resulting falling sales causing many to rein back on new store openings. However, it appears that the property investment market for the sector has “rebooted” in recent months, with investors increasingly keen to snap up primary assets in strong locations.
According to the MSCI/Colliers International UK Supermarket Investment Report, investors bought £1.3 billion worth of supermarket property assets during 2014, providing an average total return of 7 per cent.
This was despite the fact that numerous operators issued profit warnings and chose to halt new openings, causing clearly defined primary and secondary asset markets to develop.
Head of UK retail investment at Colliers International, James Watson, explained that this has allowed the sector to effectively reboot itself whilst providing numerous opportunities for a broadening base of investors.
He says; ““Operator difficulties are being offset by an improving economic situation and a more constrained supply of new supermarket assets – however, there is now a more clearly defined primary and secondary market for assets.
“Yields for the prime stores let to on RPI-linked leases will hold firm, but returns for stores let on open market rental leases are being affected and the secondary market has more pain to come.
“The current average yield gap between prime and secondary assets is simply not wide enough to reflect the inherent risk profiles of these assets so we will see further pricing adjustments this year.”
While many investors remain cautious about the outlook for the supermarket sector, there is no denying that recent profits reports have had a positive impact upon the market.
Tesco, for example, has managed to claw its way back from consistently falling sales last year to posting relatively strong rises during the past quarter, while major discounter rival Aldi posted its worst performance for several years – although sales continue to rise they are currently doing so at their slowest pace for some time, and the ebb of market share from the Big Four has contracted noticeably.
Yet Aldi remains the strongest growing brand in the supermarket sector, with more than 1 million sq ft of new space currently in its development pipeline. The Big Four, by contrast, have a combined 3.9 million sq ft of new space in the pipeline, much of which is dedicated to convenience stores and smaller supermarkets.
Nevertheless, senior associate at MSCI, Colm Lauder, says; “Supermarkets’ stronger lease profile and inflation linked rent reviews have produced a cyclical performance profile with higher peaks during recovery periods and smaller troughs in downturns.
“Over the longer term, this has helped supermarket returns to outpace other retail property types, an advantage that was most pronounced during the recent global downturn.
“Despite deteriorating trading conditions for many occupiers, supermarkets remained strong, recording a more robust total return and crucially avoiding rental value declines.”