Supermarkets reap over £1bn of property investment in 2015 as new buyers pile in

Kasmira Jefford
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Aldi together with Lidl, M&S and Waitrose have been leading the space race (Source: Getty)

Britain's supermarket sector attracted over £1bn of property investment last year as investors shrugged off the price wars and and went in search of stable returns.

Research released today by Colliers International and data analytics provider MSCI revealed that deal volumes reached £1.4bn in 2015, up slightly on the previous year but down on the record £1.8bn in 2013.

Last year’s figure was particularly strong due to one major deal, Tesco’s £733m property swap with British Land, which saw the supermarket buy back 21 stores in exchange for selling its joint venture stake in a portfolio of shopping centres.

When excluding the Tesco transaction, activity was in fact relatively subdued, Colliers said, with just 39 deals completed last year compared with 53 carried out in 2014.

But although activity remained muted, the report found that new types of investors were flocking to the market, attracted by the covenant strength of the occupiers and the long-dated, RPI-linked income streams offering an initial yield of around six per cent.

James Watson, head of retail capital markets at Colliers International, told City A.M.: “The market has always been dominated by the institutional funds who have bought en masse. It started after the recession when everybody wanted security of income.”

“But recently what we have seen is that private equity firms and overseas buyers such as family offices have started to buy, while retailers have also started to buy back leases they originally sold," he added. German, Middle Eastern and Malaysian buyers were particularly active in the second half.

The UK’s Big Four supermarkets have put the brakes on store opening plans and abandoned development projects in recent years in a bid to cut costs and adapt to changing shopping habits and fierce competition in the market. They have also been launching retail concessions in their bigger stores to deal with excess space and boost footfall.

But where the Big Four have slowed, Aldi, Lidl, Waitrose and M&S Simply Food are still pushing ahead and acquiring new stores, with the amount of supermarket space expected to grow by around 1.1m sq ft per year.

MSCI vice president, Colm Lauder, said despite the seismic changes taking place in the sector, investors continued to be attracted by what was quite a resilient sector: “With continuing volatility in the equities markets and lacklustre bond yields, there is still a compelling case for investing in property."

"In light of these factors, the report shows investors are still attracted by the covenant strength of operators, the advantageous prevalent long-term, RPI-linked lease patterns, and as a result supermarkets are likely to remain in demand despite the challenges that the sector faces”.

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