Bottom Line: Price wars can come and go but real estate is permanent
FOUR pints of milk and a warehouse near Stockton-on-Tees, please. Morrisons’ latest special offers will be welcomed by shoppers and property buyers alike, though the latter have a bit longer to enjoy the spoils of the investment.
Cutting the price of everyday groceries doesn’t look like a sustainable strategy on its own for Morrisons, with operating margins expected to be under five per cent for the first time since 2009 when the firm announces full-year figures on Thursday. This could fall further as Morrisons rolls outs more of its M convenience stores.
To tide investors over while the grocer keeps up with the burgeoning price war among the big supermarkets, a property sale may at first sight appear to make a lot of sense, particularly for a firm with a market cap of £5.5bn and a real estate portfolio of £9bn.
While founder Ken Morrison has long championed the firm’s vast estate as a helpful backstop if it were to start struggling, sceptics including activist investors Sandell and Elliott might argue that the rainy day that requires a real estate sell-off is already here.
And there would be a long line of buyers for the sites, with supermarkets in general seen as attractive tenants likely to stick around. A report by Colliers last week found that British supermarket land deals rose 50 per cent last year to a record £1.8bn. Tesco and Sainsbury’s have trimmed their land banks and called off the space race, and the pair have around 70 per cent freeholds, compared to 90 per cent at Morrisons.
However, it’s another deal done by Sainsbury’s that investors in Morrisons should remember. Property tycoon Robert Tchenguiz repeatedly called for Sainsbury’s to realise value from its properties in 2007, describing it as “a real estate company with a retail business on the side” – a term that would fit Morrisons today.
Sainsbury’s fended off the argument, and in 2010 used some of its land to plug a hole in its pension fund, in a move that would have been much harder if more of its sites were rented.
Long-term investors need to weigh up whether covering a dividend policy with a permanent property sale is a sensible idea in an industry where the next price war is never far away.