By Emanuela Barbiroglio

Supermarket property regains favour as trading improves

Investor interest in UK supermarket property is returning after a tough 2016 that saw capital values fall by 4.7%, according to the latest UK Supermarket Investment Report from Colliers International and MSCI.

Colliers and MSCI UK Supermarket Investment Report

The decline in values last year meant that returns were a barely positive 0.2%, lagging behind the 3.5% returns for UK commercial property as a whole. Supermarket property returns were also weak relative to the wider retail market, which returned 1.7%.

Investors had been put off the sector by weak trading figures from the ‘big four’ chains (Tesco, Sainsbury’s, Morrisons and Asda). However, James Watson, head of retail capital markets at Colliers, says an improvement in the fortunes of the UK’s biggest grocers in recent months has sparked renewed interest in the sector.

Supermarket returns

“Much of the negativity towards the sector evaporated as the year wore on, with a perception that the operators were beginning to turn the corner,” he says. “Christmas trading vindicated this position and many investors ceased agonising over their exposure to the sector and started buying again.”

Colliers and MSCI UK Supermarket Investment Report

In the second half of 2016, there were a number of transactions that indicated improving returns for investors, including Invesco’s £45m acquisition of Sainsbury’s in Herne Bay and ICL Pension Fund’s £27.4m acquisition of Sainsbury’s in Hythe.

Yet, over the whole of 2016, investment volumes totalled £1.18bn, down on the £1.4bn reported in 2015. One of the main factors limiting transactional activity is the lack of high-quality properties coming on to the market, suggests the report, which blames the big chains putting the brakes on development and sale-and-leaseback activity.

Colliers and MSCI UK Supermarket Investment Report 2

Last year was notable for being the first year of zero sale-and-leaseback activity by the big four since the early 2000s. Indeed, the reverse has been true, with operators buying stores back, often taking advantage of ‘buyback’ options in old sale-and-leaseback deals.

Colliers and MSCI UK Supermarket Investment Report 3

As Property Week revealed in December, Tesco bought back more than £165m of property in two separate deals with Legal & General Investment Management and Standard Life Investments.

“Taking full control of assets leaves the operators free to reboot the stores as they wish and mitigates their exposure to spiralling RPI-linked property costs,” says Watson.

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