Supermarket expansion heralds opportunities for investors

According to Savills’ latest food sector report, the growing competition amongst supermarkets looking to expand their market share and the growth in leasing rather than store ownership is creating opportunities for investors to enter the sector.

Tim Doughty, director at Savills, said: ‘Recent changes in approach have resulted in operators becoming increasingly receptive to leasing. Their historic preference for the greater control over operational formats that freeholds offered often meant that new store development was largely close to developers and investors.’

The report states that the top four grocery retailers have continued to complete sale and leaseback deals.

The ability of the supermarket sector to withstand generally poorer trading conditions has also proved attractive to investors according to Savills’ report.

The sector’s resilience was demonstrated by sales value performance during the recession of the early 1990’s. The research noted that between 1989 and 1993, all retailing saw a 24% increase in sales value, a 6% increase a year. In contrast, foodstores saw a 36% growth representing an 8% increase a year over the same period. This historic outperformance of the sector is forecasted to continue with grocers sales up to 2026 expected to see a further increase of 26%.

Mark Garmon Jones, director at Savills, added: ‘Even compared to other specific retail sectors, supermarkets would appear to have been hit less hard than say retail warehousing. We believe that this resilience is based on the operational strength of the grocery sector maintaining covenant strength. A number of investors have entered the sector owing to the improved rental growth prospects. In addition, rents still appear affordable and letting demand is holding up well from the main players to the ever expanding value operators.’

The report also said that the recent investigation into the grocery sector by the Competition Commission may also present opportunities for developers and investors as it could restrict future operator-led developments.

Jeremy Hinds, director at Savills, said: ‘Operators could take leases in order to avoid the test as it will only apply in situations where there is a named retailer from the outset of the planning process. On developer led schemes there is nothing to stop grocery operators from taking leases following the granting of planning permission unless the Local Planning Authority/Office of Fair Trade (OFT) decides to grant approval based on the exclusion of certain named occupiers.

‘Furthermore, the expected removal of the ‘needs test’ from PPS6 later in the year is also likely to create potential opportunities.’

The report’s investment statistics for the supermarket sector show that despite a historically strong performance, it has not been immune to the impacts of the economic downturn, although it would appear more resilient. The report said that yields have been steadily moving out since June 2007 and as of June 2008 had softened by 88bp to 5.3%.