colliers retail capital markets - uk supermarket investment … · 2018-03-28 · in line with...

JANUARY 2018

UK SUPERMARKETINVESTMENT REVIEW

EXECUT IVE SUMMARY

A more positive trading environment plus the continued expansion of discount operators has given the UK supermarket sector more dynamism in the past year.

Improved investor sentiment towards supermarket property assets saw investment activity increase by 18% in 2017 with £1.42bn of assets being traded. Yields for prime supermarket assets have sharpened to 4.25%, while secondary assets are trading at 5.50%+.

New store development remains almost exclusively the preserve of the discount operators but there are some isolated instances of selective expansion among the ‘Big Four’ – Tesco, Sainsbury’s, ASDA and Morrisons.

For most owners of existing supermarkets, the general absence of rental growth means that the emphasis is very much on active asset management and how to enhance holdings through regears or other initiatives.

This is helping to normalise the sector and rebalance some of the ‘legacy’ rents which are a

hang-over from the hot market which prevailed during the ‘race for space’ several years ago.

There is less debate on what is the ‘right size’ for a supermarket and instead the focus is on the trading characteristics of individual stores, their demographic context and the grade of income they produce. In line with this, Colliers has developed a new Supermarket Vitality Index to enable a more forensic assessment of supermarket assets.

In summary, confidence has returned to the supermarket sector. We expect transactional volumes in the investment market to be similarly progressive this year with current yield levels being maintained although increasing demand may produce a sharpening of yields on the most prime assets.

There is still no sign of rental growth outside London and the affluent South East, but we are starting to see some signs of stability in the occupational markets and investors are responding to this calmer outlook.

WE ARE START ING TO SEE SOME S IGNS OF STABIL ITY

IN THE OCCUPAT IONAL MARKETS AND INVESTORS ARE RESPONDING TO TH IS

CALMER OUTLOOK

“

”• Supermarket investment volumes rose by 18% to £1.42bn in 2017• The high level of investor demand for long-dated income secured against strong corporate

covenants is favouring the supermarket sector• UK institutions emphatically back in the market after taking a stand-back when the sector

faced acute challenges c.2015-2016• Secondary assets primarily attracting overseas investment• Yields for prime supermarket assets have sharpened to 4.25%, while secondary assets are

trading at 5.50%+• Store expansion almost exclusively confined to discount operators • Less focus on store ‘rightsizing’ and more on their individual performance and demographics• Lack of rental growth is compelling landlords to be active asset managers and look at initiatives

to preserve/extend income streams

3

A CORNER TURNED? The UK supermarket sector has made substantial positive progress in the past year and this has been reflected by the level of investment activity and values in the property market which underpins it.

With the Big Four operators all reporting better trading figures and the discounters continuing to expand, there has been a greater feeling of stability in the sector. Tesco returned to paying a dividend to shareholders last October and rose to the top of the FTSE100 as a result.

There has been a sustained period of sales growth and whilst margins are still under pressure there is generally more calm in the trading outlook.

The Occupier Market

In terms of store expansion, the market remains dominated by the discounters, with little activity from the high end operators and the “Big Four”.

However, the first large supermarket lettings for over three years point to a possible cautious foray into new store development by one or two of the major operators.

Lease restructuring remains the main leasing activity, but the terms on offer vary dramatically from case to case.

0%

5%

10%

15%

20%

25%

30%

31-Dec-1701-Jan-1703-Jan-16

OcadoOtherSymbols & Independent

IcelandLidlWaitroseCo-OpAldiMorrisonsAsdaSainsbury'sTesco

Grocery Market Share at 03/12/2017

Continued Growth of the Discounters

The discounters stepped up their acquisitions campaigns again this year, with Aldi announcing the prospect of quadrupling the number of stores throughout the UK, with a store for every 25,000 people and up to eight stores in some towns and cities.

Lidl also changed up a gear, publicising their new requirement for larger stores of 20,000 to 30,000 sq ft. Having previously been limited in their growth plans by their desire for freehold sites, they announced their intention to remedy this by focusing on more leasehold transactions. With an objective of

doubling the size of their UK portfolio, they kicked this off with a number of town centre acquisitions of parts of former Bhs stores. They also went so far as to acquire freehold stores occupied by non-food retailers with a view to opposing renewal of the occupiers’ tenancies on lease expiry (on the grounds of their own occupation). This is an aggressive new development which has not been seen in the grocery sector since the height of the “space race” in 2010/11.

Iceland also announced expansion plans, with a desire to open 400 new stores in their successful “Food Warehouse” format.

4 UK SUPERMARKET INVESTMENT REVIEW 2018 5

110

105

100

95

90

RETA

IL P

RICE

INDE

XTHE SUPERMARKET SECTOR IN 2017 – EVENTS T IMEL INE

January Tesco / Booker shake hands

on £3.7bn merger deal

February First clear

indication of post-Brexit inflation on

food. Waitrose announces

closure of six older stores

MARCH Asda signs up for new 33,000 sq ft

supermarket in Cricklewood

APRIL Aldi reveals

plans to quadruple

stores across the UK

APRIL Funding of Sainsbury’s, Woodham Ferrers by

KFIM

MAY Embattled wholesaler P&H put up

for sale. Seven months after

“Marmitegate”, Tesco

increases prices on the

spread

JUNE Tesco

announces 1,200 proposed

job losses at HQ

AUGUST Acquisition of Tesco Extra, Kettering by

L&G

JULY Lidl increase

rate of expansion with

increased interest in leasehold

deals

SEPTEMBER Morrisons

signs up for new 45,000 sq ft supermarket

in Kirkby

OCTOBER Sainsbury’s

South Woodford goes under offer at sub 4.00% NIY

NOVEMBER Nisa members accept Co-op bid. Iceland continues

expansion of Food

Warehouse and opens its 900th store

DECEMBER CMA gives

Tesco / Booker merger deal

the green light “without

remedy”. Co-op announces search for 100

additonal stores in 2018


All quiet at the high end…

M&S opened 34 food stores in the first half of the year whilst announcing the closure of 30 general merchandise/clothes stores. However, the latter part of the year saw a slow-down in “Food Hall” expansion. Following a poor Christmas, M&S have pulled out of some proposed stores and are renegotiating the terms on others.

Waitrose remained quiet in terms of new acquisitions. They opened eight new stores (all of which had already been committed to in previous years) whilst closing six older, under-performing properties, often where their new stores had opened nearby and catchments overlapped.

Whole Foods Market were bought by Amazon in a surprise £10.7bn acquisition - giving Amazon extensive “bricks and mortar” representation from 460 stores, mostly in the US and Canada. In the UK, the medium / long term impact is uncertain, although Whole Foods swiftly announced the closure of their non-London stores in Glasgow and Cheltenham where servicing had always been problematic.

Booths, the family owned, up-market grocer in the North West, was reportedly for sale at the end of the year with a price tag of £130m to £150m. The company has had a difficult time after a number of stores were hit hard by Storm Desmond at the end of 2015. We await details of the likely purchaser with interest.

The Big Four

With the increasing need to compete on price with the discounters, the major supermarket operators announced further operational cost cuts via significant job losses in stores and head office. Tesco announced 2,000 job cuts while Sainsbury’s announced 1,500 and Asda a further 1,200.

At the same time, Tesco’s mega-merger with Booker for £3.7bn was announced at the beginning of the year – waved through at year end by the CMA “without remedy”.

As they have been focusing capital investment on price reductions, the Big Four’s expansion activity has remained muted. In London, new supermarket opportunities are rare, but Asda agreed terms to take a new 30,000 sq ft store in a residential development in Cricklewood, NW2.

Outside London, new large store development was limited to a single letting to Morrisons of a 45,000 sq ft store anchoring a new retail park in Kirkby, Liverpool. Asda were also interested, but failed to crystalise their proposals. This is the first Big Four supermarket

letting in over three years (i.e. since March 2014), indicating cautious renewal of one or two of the major operators’ growth plans. During the year, Morrisons employed a new Head of Property Acquisitions, Mark Taylor, who was previously a Property Director at Aldi and jointly responsible for their acquisition programme of c.60 stores a year. His role is to seek new store opportunities and we understand terms are under negotiation for a limited number of other possible sites.

Regears

The main leasing activity in the large supermarket sector has involved the restructuring of existing leases. The landlords’ desire to shore up long term income and boost investment values has, in some cases, dovetailed with the major operators’ plans to secure trading continuity for their best stores, add petrol filling stations and reduce operational costs.

Under the new accounting standards, IFRS 16 (due to come into effect in April 2019), rents will no longer be seen as an operational cost and appear in the profit & loss section of the company’s accounts. Instead, the present value of the estimated rental commitments over the term of the lease will appear in the balance sheet as a liability. At the same time, the value of the lease will appear as an asset. Bearing in mind the difficulty in attributing value to the lease, operators vary in how concerned they are regarding the effect of longer lease terms on their balance sheets.

The terms that have been agreed on regears vary dramatically depending on location, store performance, perceived threat of losing the store and alternative use value of the site. Examples of the range of terms agreed have been as follows:

• In Kingston-upon-Thames, a 10-year lease extension has been agreed with Asda at the current rent without any incentives (i.e. no rent reduction, rent free or capital payments)

• In Byker, Newcastle in the north east, terms have been agreed to allow the operator to build a petrol filling station and extend the lease term. with a capital payment to cover the construction and planning costs and share the marriage value.

• In another less affluent, northern location, the landlords offered a substantial rent reduction of c.£300,000 p.a. to a Big Four operator to extend the term. The operator turned this down at board level on the grounds they “anticipate a greater rent reduction at lease renewal”.


Occupier Address Transaction GIA Analysis

AsdaCricklewoodLondon NW2

Open Market Letting

30,866 sq ft £23 - £24 per sq ft*

MorrisonsKirkby, Liverpool

Open Market Letting

45,531 sq ft £14 per sq ft *

Sainsbury’sHamiltonStrathclyde

Rent Review(Arbitration Award)

75,000 sq ft£18.10 per sq ft (up from £17.50 per sq ft)

AsdaMitchamLondon

Rent Review 29,416 sq ft£20 per sq ft (up from £15 per sq ft net)

Sainsbury’sBletchleyMilton Keynes

Lease Renewal 40,593 sq ft£6.45 per sq ft (down from £10 per sq ft)

AldiSt AlbansHertfordshire

Open Market Letting

18,500 sq ft £25 per sq ft

(* Deals subject to confidentiality – details to be confirmed)

RECENT OCCUPIER TRANSACT IONS


GIV ING STORES A HEALTHCHECK

The Supermarkets Vitality Index

Long-dated and secure income in an uncertain market makes supermarkets one of the most attractive retail investment propositions. However, the investment credentials of a single supermarket or portfolio will hinge on a breadth of factors relating to both the positioning of the store today and its future prospects.

The major supermarket groups undertake months, sometimes years, of detailed analytics, sales forecasting and financial modelling before signing off a new store opportunity. For it is critical that any investment today is in a location where there is credible sales potential and the prospects for future growth are strong.

Colliers’ Retail Strategy team has developed a new supermarket ‘Vitality Index’, providing investors the tools needed for an accurate assessment of the investment credentials of a single store or supermarket portfolio. The tool, underpinned by years of site assessment experience in the grocery sector, combines Colliers in-house data with third party sources to rank every UK supermarket based on a view

of current performance and future potential.

In a single output, through leveraging over 20 unique data inputs and forecasts commonly used by the major grocers, the Vitality Index provides an in-depth critical view of the health of a supermarket asset. The flexible and simple reporting output ranks any supermarket against other assets in a specific portfolio, in the same town or under the same fascia. The tool can also be adapted to provide a ranking of any supermarket according to specific credentials set by any investor.

Future growth potential is a critical component of any supermarket investment appraisal. Central to the forward looking assessment of health for every supermarket is population and demographic change, competition openings and local infrastructure developments, all of which are accounted for and scored in the Vitality Index.

The adjacent table provides a sample of the typical output of the tool. These metrics have been weighted according to their importance in the investment decision making process to form a final Vitality Score.

Metric Rank Metric Rank

Current Performance

Trading Density 4 Configuration & Parking

6Overall, this store is the third

strongest asset in the portfolio owing to relatively high sales density

forecast. The low population and high competition in the catchment is

notable, but does not raise significant concerns owing to the strong trading performance and clear market leading

position.

Market Position 1 Catchment Alignment

9

Competition/ Population

12Current

Performance Ranking:

4

Future Potential

Online Shopping 1 Competitor Impact

1

24% of the catchment are currently aged over 65 and this is expected to

rise to 29% by 2025. This ageing profile may result in some shifts in shopping habits, but the ideal store size and conforming layout mitigate concerns about the store’s relevance

to an older audience.

Discounter Presence

1 Population Growth

1

Major Infrastructure

Projects8 Future

Potential Ranking:2

Vitality Score: 16 Portfolio Rank 3Final ViewLeading position in town and

attractive future prospects ranks store third in portfolio.


THE INVESTMENT MARKET

Long-view favours the sector

Real estate capital markets are dominated at present by a demand for long-dated income.

Investors are competing fiercely for assets with long leases and secure income. The supermarket sector has always featured the former but the major difficulties that it faced recently made UK institutions – traditionally the major buyers in the sector – take a standback. They are now emphatically back in the market.

Rising transaction volumes

The volume of investment activity in the sector peaked in 2013 at £1.8bn. This was just prior to the ‘race for space’ unravelling and the aggressive expansion of the discount operators. Concerned over price-cutting, falling margins and the cost implications of large store estates, investors voted with their feet and by 2015, volumes had tracked down to just under £1.2bn.

89%

75%

89% 87%

97%

53%

18%

34%

2010 2011 2012 2013 2014 2015 2016 2017

2017 Investment Activity - Institutional Market Share

100

90

80

70

60

50

40

30

20

10

0

2017 Investment Activity - Institutional Market Share

Value slide arrested - yield trends

2010 2011 2012 2013 2014 2015 2016 2017

5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

NIY

(%)

Average 20 Yr RPI Supermarket Yield Average 10 Yr UK Gilt Yield

Retailer

PropCo

Other

Institution 38.09%

8.75%

52.81%

0.35%

2017 Transactions by Vendor

Other

Overseas

PropCo

Institution

Retailer

38.44%

31.84%

18.54%

9.71%

1.47%

2017 Transactions by Purchaser

Buying in 2017 has shown a bounceback. UK supermarket investment rose by 20% in the first six months of the year with £727m of transactions taking place at an average net initial yield of 5.05%. This was well ahead of the corresponding period in 2015 when £603m of assets were transacted, at a yield of 5.35%.

The second half of 2017 registered another £693m of deals to take total volume for the year to £1.42bn – an increase of 18% on 2016.

Value slide arrested

The supermarket investment market had seen a slight reduction in values between 2015 and 2016 as the operators struggled with new market conditions, but renewed confidence has seen this trend arrested.

Yields for prime supermarket assets have come down to 4.25% while secondary assets are trading at 5.50%+.

Num

ber

of T

rans

acti

ons

Tota

l Cap

ital

Val

ue (

£)

2010

2011

2012

2013

2014

2015

2016

2017

70

60

50

40

30

20

10

0

£2,000,000

£1,800,000

£1,600,000

£1,400,000

£1,200,000

£1,000,000

£800,000

£600,000

£400,000

£200,000

£0

Sainsbury's Morrisons Asda Tesco Waitrose M&S Other Total

Supermarket Transactions 2010 - 2017


Property Date Comment

Milton KeynesWaitrose

February 2017

In February, Legal & General sold a 43,582 sq ft Waitrose store to Surrey County Council for £28.95m, 4.25% NIY.

South Woodham Ferrers Sainsbury’s

April 2017

Knight Frank Investment Manage-ment’s £22m forward funding of the development of a new Sainsbury’s in South Woodham Ferrers reflected a 5.25% yield. The store is let on a new 25-year lease with fixed RPI-linked uplifts.

BedfordAldi

April 2017A newly developed Aldi store in Bedford was sold in April to AXA Real Assets for £7.50m, a record 4.30% NIY.

SandhurstWaitrose

May 2017Sold by ICG Longbow to CBRE GI for £7.75m reflecting a 4.35% NIY.

KetteringTesco

August 2017Acquired by Legal & General for £51m, 5.85% NIY.

AshfordSainsbury’s

August 2017

Acquired by Atrato Supermarket REIT for £80m reflecting 4.50% NIY. Large store of 124,348 sq ft, annual RPI linked reviews with 21 years unexpired.

South WoodfordSainsbury’s

December 2017Sold by the British Land / Sainsbury’s JV to LaSalle for £36.75m at a sub-4.00% NIY.

Making the grade

The supermarket property investment market is now increasingly focused on assessing the quality of individual stores and the income which flows from them. With investors simply looking to buy income, the grading of revenue is of primary importance.

Similarly, investors should be looking more closely at the demographic setting of each store and the provision of supermarkets in that area.

Through our Vitality Index (see page 13) and our analysis of income quality, we are taking an

enhanced and broader based approach to investment in the sector.

Not just bananas and bread

Challenging market conditions have not left the major operators much elbow room to look at diversification into higher margin retailing offers, but the Sainsbury’s/Argos tie-up has proved to be popular with shoppers despite initial scepticism from City commentators. Sainsbury’s is now looking at further collaborations although it is unlikely they would involve full scale acquisitions as per Argos. Tesco’s Booker

acquisition is steering a course through any competition objections and is being seen as a good broadening of the business’s estate, especially in the context of online fulfilment.

Getting shopping that has been ordered online delivered to customers remains a major headache for operators. Whilst supporting brand loyalty, it is a loss leader for the supermarkets. However, some are now combining the desire to have less sales floorspace with the need for online fulfilment capacity by converting areas of existing stores into pure logistics space.

In this vein, it is now becoming apparent that the debate about store size is becoming less pivotal to the sector. As operators look to repurpose their existing estates, having the ‘wiggle room’ to dedicate part of what had previously been thought an oversized store to online fulfilment can be something of a silver lining.

Similarly, whilst investors retrenched to London and the South East while the sector was embattled, it is now clear that many regional assets are performing strongly and, in some instances, provide better value to buyers.

Confidence has returned to the supermarket sector; and we expect transactional volumes in the investment market to be similarly progressive. There is still no sign of rental growth outside London, but we are starting to see some signs of stability in the occupational markets.

The average lot sizes of investment deals are lower and institutions are being highly selective on the basis of income and assets. The lack of prime stock will continue to be an issue, but there should be plenty of secondary product available. As a consequence, more investment will be flowing into the secondary market and it will be interesting to see if this narrows the yield gap between prime and secondary assets to a point which is unrepresentative of their respective strengths.

From a more macro point of view, Amazon’s acquisition of Whole Foods which completed last August may just be a forerunner of what is to come in the UK supermarket sector. While Amazon is getting its offer together, Alibaba is building a grocery model in China which could be rolled out worldwide. Its Hema grocery concept has been two years in the making and provides a new concept in online and offline grocery shopping with an integrated paying platform. A small but vivid example of how different Hema is from its western counterparts is that its customers are able to choose a live lobster online, have it cooked in a specific way by Hema before it is delivered to their home.

Last year saw major consolidation in the shopping mall sector and the prospect of something similar in the UK supermarket world is not beyond imagination.

In terms of corporate activity, Tesco-Booker may not be the last of the lateral hook-ups between supermarket operators and other businesses. There is definitely more scope to explore how the supermarket business can work with third-party logistics operators for mutual benefit - and this could extend beyond just the existing core relationship of putting food on shelves.

MARKET-MAKING DEALS INVESTMENT MARKET OUTLOOK


TESCO-BOOKER MAY NOT BE THE LAST OF THE LATERAL

HOOK-UPS BETWEEN SUPERMARKET OPERATORS

AND OTHER BUSINESSES

“

”


FOR MORE INFORMATION, GET IN CONTACT

James Watson Head of Retail Capital Markets +44 20 7344 6877 [email protected]

Matthew Hobbs Head of Retail Lease Advisory +44 20 7344 6843 [email protected]

Matthew Thompson Associate Director | Retail Strategy +44 20 7344 6817 [email protected]

Colliers International 50 George Street London W1U 7GA

colliers.com

colliers retail capital markets - uk supermarket investment … · 2018-03-28 · in line with...

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