Property investors face shortages at Colliers International supermarkets

The latest report from Colliers UK Grocery Real Estate Review says that last year £1.85bn of supermarket assets changed hands.

Although this is just above the 2020 level, Colliers thinks it would have been much higher if the supply of assets had been more plentiful.

Tom Edson, Head of UK Retail Capital Markets at Colliers said: “Given that the sector remains in demand and has been the subject of such concerted buying, it is not immediately obvious where the next tranche of assets for sale will come from.”

The profile of the supply of assets is also improving somewhat because buyers are less demanding in the criteria they apply to potential purchases, notes the firm.

Mr Edson added: “Until recently, the bond-like characteristics of supermarket assets, together with strong corporate commitments on long-term leases with upward revisions to indexed rents, were the main attractions of the market. sector.

“These considerations still apply, but the pandemic has clearly demonstrated the resilience of the sector and brought in a new wave of investors – many of whom were turning away from other real estate sectors.

“In the aftermath, what we are also seeing is that buyers are not only focusing on indexed assets, but will also be buying leased assets with rent reviews linked to the open market rental value and are not driven higher by the trajectory of the Retail Price Index or Consumer Price Index. This less stringent buying approach makes a new segment of assets increasingly sellable.”

Faced with this supply-demand equation, returns for the sector as a whole continue to rise. Average returns for blue chip supermarkets fell from 4.35% in 2020 to 4.25% last year – although the sale of some particularly sought-after assets led to returns of around 3-3.5%.

After their respective private equity acquisitions last year, ASDA and Morrison’s could be a potential source of new assets.

“Throughout its history, the Morrisons freehold estate has been sacrosanct, but it remains to be seen how the company’s new owners will see it and whether a selective sales program can be a way to recoup a part of the cost of acquiring the business,” Edson added. .

“However, both businesses will be acutely aware that they do not wish to trade short-term capital appreciation for a permanent liability on the balance sheet. Against this backdrop, 2021 has seen no store sale and leaseback activity. and – due to fierce market competition – no opportunity for operators to buy back properties on which they had previously entered into sale-leaseback agreements.”

Although the grocery industry is currently booming, operators are still looking to “scale up” their domains in the face of the growth of online grocery shopping and the legacy of the “space race” of the 20s. 2000.

The Retail Strategy team at Colliers estimates that by 2030 around 8% of total UK grocery store floor space – equivalent to around 12 million square feet – could be affected by the need to reconfigure stores to respond to the increase in online shopping.

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