Institutions stock up on food stores

Investors are once again viewing the food retail sector as a safe place for their cash - Simon Creasey finds out why

Investors appear to have rediscovered their appetite for food stores if the latest figures from Savills are anything to go by. Although year-to-date investment volumes for 2017 stand at £618.6m, which is down 19% on the same period in 2016, Savills says the data is skewed by a large deal that completed last year. If this deal, which has yet to be reported, is excluded from the analysis, the year-to-date transaction volumes for 2017 would be up 36.2%, with the deal count also up 23.3% on the same period in 2016.

The figures have been driven by institutional investors resuming activity in the sector, having been new sellers in 2016. Savills’ figures show that year-to-date transaction volumes for institutions total £200.3m – a 9.9% increase on 2016 full-year volumes. This makes them the biggest buyers so far this year, accounting for 32.8% of year-to-date transaction volumes. By contrast, food store operators accounted for 21.3% of deals having been the most active investors in 2016 with a 47.6% market share.

Wider investor pool

Savills investment director Katie Taylor has noticed increased interest from a range of investors. “Food stores have long been particularly popular with institutional investors, as the long leases and strong covenants are attractive to those seeking long-term secure income,” she says.

“However, we have recently noted appetite from a wider investor pool, particularly for food stores with residential development potential. These assets are often located in densely populated areas with established infrastructure. Hence the underlying residential value of the sites can be an attractive benefit for investors.”

As expected, London and the South East continue to account for a disproportionately large share of deals – 40.5% over the first eight months of 2017. However, the rest of the UK’s share of 59.5% is an increase on its 53.3% January-to-August figure last year.

Appetite for food store assets – particularly good-quality index-linked stores and those with redevelopment potential in London and the South East – is keeping prime yields low, according to Marie Hickey, director in the commercial research team at Savills.

“Income security is back on the agenda for investors, and food stores – particularly those on long inflation-linked leases – tick this box,” she says. “Provided that prime yields remain off their 2014 low and the re-entrance of institutional buyers [continues], we expect downward pressure on yields to remain for the rest of the year."

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