UK SUPERMARKET INVESTMENT REVIEW - JANUARY 2018 - Colliers Retail Capital Markets
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UK SUPERMARKET INVESTMENT REVIEW JANUARY 2018
EXECUTIVE SUMMARY
“
WE ARE STARTING TO SEE
SOME SIGNS OF STABILITY
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.
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
IN THE OCCUPATIONAL Yields for prime supermarket assets have
sharpened to 4.25%, while secondary assets are
developed a new Supermarket Vitality Index to
enable a more forensic assessment of
MARKETS AND INVESTORS trading at 5.50%+.
New store development remains almost exclusively
supermarket assets.
In summary, confidence has returned to the
ARE RESPONDING TO THIS the preserve of the discount operators but there
are some isolated instances of selective expansion
supermarket sector. We expect transactional
volumes in the investment market to be similarly
among the ‘Big Four’ – Tesco, Sainsbury’s, ASDA progressive this year with current yield levels
CALMER OUTLOOK and Morrisons. being maintained although increasing demand
may produce a sharpening of yields on the most
For most owners of existing supermarkets, the
”
prime assets.
general absence of rental growth means that the
emphasis is very much on active asset There is still no sign of rental growth outside
management and how to enhance holdings London and the affluent South East, but we are
through regears or other initiatives. starting to see some signs of stability in the
occupational markets and investors are
This is helping to normalise the sector and
responding to this calmer outlook.
rebalance some of the ‘legacy’ rents which are a
• 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
• L ack 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 Grocery Market Share at 03/12/2017
substantial positive progress in the
past year and this has been reflected 30%
by the level of investment activity and 03-Jan-16 01-Jan-17 31-Dec-17
values in the property market which
25%
underpins it.
With the Big Four operators all reporting
better trading figures and the discounters 20%
continuing to expand, there has been a
greater feeling of stability in the sector.
15%
Tesco returned to paying a dividend to
shareholders last October and rose to the
top of the FTSE100 as a result. 10%
There has been a sustained period of
sales growth and whilst margins are still
5%
under pressure there is generally more
calm in the trading outlook.
The Occupier Market 0%
Tesco Sainsbury's Asda Morrisons Aldi Co-Op Waitrose Lidl Iceland Symbols & Other Ocado
Independent
In terms of store expansion, the market
remains dominated by the discounters,
with little activity from the high end Continued Growth of the Discounters doubling the size of their UK portfolio, they kicked this off with
operators and the “Big Four”. a number of town centre acquisitions of parts of former Bhs
The discounters stepped up their acquisitions campaigns again
stores. They also went so far as to acquire freehold stores
However, the first large supermarket this year, with Aldi announcing the prospect of quadrupling the
occupied by non-food retailers with a view to opposing
lettings for over three years point to a number of stores throughout the UK, with a store for every
renewal of the occupiers’ tenancies on lease expiry (on the
possible cautious foray into new store 25,000 people and up to eight stores in some towns and cities.
grounds of their own occupation). This is an aggressive new
development by one or two of the
Lidl also changed up a gear, publicising their new requirement development which has not been seen in the grocery sector
major operators.
for larger stores of 20,000 to 30,000 sq ft. Having previously since the height of the “space race” in 2010/11.
Lease restructuring remains the main been limited in their growth plans by their desire for freehold
Iceland also announced expansion plans, with a desire to open
leasing activity, but the terms on offer sites, they announced their intention to remedy this by
400 new stores in their successful “Food Warehouse” format.
vary dramatically from case to case. focusing on more leasehold transactions. With an objective of
4 UK S U PERM ARK E T INVES T MENT REVIEW 2 0 1 8 5
THE SUPERMARKET SECTOR
IN 2017 – EVENTS TIMELINE
110
January
Tesco / Booker
shake hands
on £3.7bn February
merger deal First clear
indication of
post-Brexit APRIL
105 inflation on
MARCH
Asda signs Aldi reveals
food. Waitrose plans to
up for new
announces quadruple
33,000 sq ft
closure of six stores across
supermarket in
older stores the UK
Cricklewood
RETAIL PRICE INDEX
NOVEMBER
100 AUGUST SEPTEMBER
OCTOBER
Sainsbury’s
Nisa members
Acquisition of accept Co-op DECEMBER
Morrisons South
Tesco Extra, bid. Iceland CMA gives
JUNE JULY signs up for Woodford goes
Kettering by continues Tesco / Booker
APRIL Tesco Lidl increase new 45,000 sq under offer at
MAY L&G expansion of merger deal
Funding of announces rate of ft supermarket sub 4.00% NIY
Embattled Food the green light
Sainsbury’s, 1,200 proposed expansion with in Kirkby
wholesaler Warehouse “without
Woodham job losses increased
P&H put up and opens its remedy”. Co-
Ferrers by at HQ interest in
for sale. Seven 900th store op announces
KFIM leasehold
months after search for 100
deals
“Marmitegate”, additonal
95 Tesco
increases
stores in 2018
prices on the
spread
90
6 UK SU PER M ARK E T INVES T MENT REVIEW 2 0 1 8 7
All quiet at the high end… letting in over three years (i.e. since March 2014),
indicating cautious renewal of one or two of the
M&S opened 34 food stores in the first half of the
major operators’ growth plans. During the year,
year whilst announcing the closure of 30 general
Morrisons employed a new Head of Property
merchandise/clothes stores. However, the latter part
Acquisitions, Mark Taylor, who was previously a
of the year saw a slow-down in “Food Hall” expansion.
Property Director at Aldi and jointly responsible for
Following a poor Christmas, M&S have pulled out of
their acquisition programme of c.60 stores a year. His
some proposed stores and are renegotiating the
role is to seek new store opportunities and we
terms on others.
understand terms are under negotiation for a limited
Waitrose remained quiet in terms of new acquisitions. number of other possible sites.
They opened eight new stores (all of which had already
Regears
been committed to in previous years) whilst closing six
older, under-performing properties, often where their new The main leasing activity in the large supermarket
stores had opened nearby and catchments overlapped. sector has involved the restructuring of existing
leases. The landlords’ desire to shore up long term
Whole Foods Market were bought by Amazon in a
income and boost investment values has, in some
surprise £10.7bn acquisition - giving Amazon extensive
cases, dovetailed with the major operators’ plans to
“bricks and mortar” representation from 460 stores,
secure trading continuity for their best stores, add
mostly in the US and Canada. In the UK, the medium /
petrol filling stations and reduce operational costs.
long term impact is uncertain, although Whole Foods
swiftly announced the closure of their non-London Under the new accounting standards, IFRS 16 (due to
stores in Glasgow and Cheltenham where servicing had come into effect in April 2019), rents will no longer be
always been problematic. seen as an operational cost and appear in the profit
& loss section of the company’s accounts. Instead,
Booths, the family owned, up-market grocer in the
the present value of the estimated rental
North West, was reportedly for sale at the end of the
commitments over the term of the lease will appear
year with a price tag of £130m to £150m. The company
in the balance sheet as a liability. At the same time,
has had a difficult time after a number of stores were
the value of the lease will appear as an asset.
hit hard by Storm Desmond at the end of 2015. We
Bearing in mind the difficulty in attributing value to
await details of the likely purchaser with interest.
the lease, operators vary in how concerned they are
The Big Four regarding the effect of longer lease terms on their
balance sheets.
With the increasing need to compete on price with
the discounters, the major supermarket operators The terms that have been agreed on regears vary
announced further operational cost cuts via significant dramatically depending on location, store performance,
job losses in stores and head office. Tesco announced perceived threat of losing the store and alternative use
2,000 job cuts while Sainsbury’s announced 1,500 and value of the site. Examples of the range of terms agreed
Asda a further 1,200. have been as follows:
At the same time, Tesco’s mega-merger with Booker • In Kingston-upon-Thames, a 10-year lease extension
for £3.7bn was announced at the beginning of the has been agreed with Asda at the current rent
year – waved through at year end by the CMA without any incentives (i.e. no rent reduction, rent
“without remedy”. free or capital payments)
As they have been focusing capital investment on • In Byker, Newcastle in the north east, terms have
price reductions, the Big Four’s expansion activity has been agreed to allow the operator to build a petrol
remained muted. In London, new supermarket filling station and extend the lease term. with a
opportunities are rare, but Asda agreed terms to take capital payment to cover the construction and
a new 30,000 sq ft store in a residential development planning costs and share the marriage value.
in Cricklewood, NW2.
• In another less affluent, northern location, the landlords
Outside London, new large store development was offered a substantial rent reduction of c.£300,000 p.a.
limited to a single letting to Morrisons of a 45,000 sq ft to a Big Four operator to extend the term. The
store anchoring a new retail park in Kirkby, Liverpool. operator turned this down at board level on the
Asda were also interested, but failed to crystalise grounds they “anticipate a greater rent reduction at
their proposals. This is the first Big Four supermarket lease renewal”.
8 UK SU PER M ARK E T INVES T MENT REVIEW 2 0 1 8 9
RECENT OCCUPIER
TRANSACTIONS
Occupier Address Transaction GIA Analysis
Cricklewood Open Market
Asda 30,866 sq ft £23 - £24 per sq ft*
London NW2 Letting
Kirkby, Open Market
Morrisons 45,531 sq ft £14 per sq ft *
Liverpool Letting
Rent Review £18.10 per sq ft (up
Hamilton
Sainsbury’s (Arbitration 75,000 sq ft from £17.50 per sq
Strathclyde
Award) ft)
£20 per sq ft (up
Mitcham
Asda Rent Review 29,416 sq ft from £15 per sq ft
London
net)
£6.45 per sq ft
Bletchley
Sainsbury’s Lease Renewal 40,593 sq ft (down from £10
Milton Keynes
per sq ft)
St Albans Open Market
Aldi 18,500 sq ft £25 per sq ft
Hertfordshire Letting
(* Deals subject to confidentiality – details to be confirmed)
10 UK S U PERM ARK E T INVES T MENT REVIEW 2 0 1 8 11
GIVING STORES
A HEALTHCHECK Metric Rank Metric Rank
Configuration
Trading Density 4 6
& Parking Overall, this store is the third
strongest asset in the portfolio owing
to relatively high sales density
forecast. The low population and high
The Supermarkets Vitality Index of current performance and future potential. Current Catchment
Market Position 1 9 competition in the catchment is
Performance Alignment
notable, but does not raise significant
Long-dated and secure income in an uncertain market In a single output, through leveraging over 20 unique
concerns owing to the strong trading
makes supermarkets one of the most attractive retail data inputs and forecasts commonly used by the performance and clear market leading
investment propositions. However, the investment major grocers, the Vitality Index provides an in-depth Current position.
Competition/
credentials of a single supermarket or portfolio will critical view of the health of a supermarket asset. The 12 Performance 4
Population
hinge on a breadth of factors relating to both the flexible and simple reporting output ranks any Ranking:
positioning of the store today and its future prospects. supermarket against other assets in a specific
portfolio, in the same town or under the same fascia.
The major supermarket groups undertake months, Competitor
The tool can also be adapted to provide a ranking of Online Shopping 1 1
sometimes years, of detailed analytics, sales Impact
any supermarket according to specific credentials set
forecasting and financial modelling before signing off a 24% of the catchment are currently
by any investor.
new store opportunity. For it is critical that any aged over 65 and this is expected to
investment today is in a location where there is Future growth potential is a critical component of any Discounter Population rise to 29% by 2025. This ageing
1 1
credible sales potential and the prospects for future supermarket investment appraisal. Central to the Future Potential Presence Growth profile may result in some shifts in
growth are strong. forward looking assessment of health for every shopping habits, but the ideal store
supermarket is population and demographic change, size and conforming layout mitigate
Colliers’ Retail Strategy team has developed a new concerns about the store’s relevance
competition openings and local infrastructure Major
supermarket ‘Vitality Index’, providing investors the Future to an older audience.
developments, all of which are accounted for and Infrastructure 8 2
tools needed for an accurate assessment of the Potential Ranking:
scored in the Vitality Index. Projects
investment credentials of a single store or
supermarket portfolio. The tool, underpinned by years The adjacent table provides a sample of the typical
of site assessment experience in the grocery sector, output of the tool. These metrics have been weighted Leading position in town and
combines Colliers in-house data with third party according to their importance in the investment Final View Vitality Score: 16 Portfolio Rank 3 attractive future prospects ranks
sources to rank every UK supermarket based on a view decision making process to form a final Vitality Score. store third in portfolio.
12 UK SU PER M ARK E T INVES T MENT REVIEW 2 0 1 8 1320172017 Investment
Investment Activity
Activity - Institutional
- Institutional MarketMarket
Share Share
97%
100
89% 89% 87%
90
THE 80
70
75%
60 53%
INVESTMENT MARKET 50
40 34%
30
18%
20
10
Long-view favours the sector Buying in 2017 has shown a bounceback. UK
0
supermarket investment rose by 20% in the first six
Real estate capital markets are dominated at present by a 2010 2011 2012 2013 2014 2015 2016 2017
months of the year with £727m of transactions
demand for long-dated income.
taking place at an average net initial yield of 5.05%.
Investors are competing fiercely for assets with long leases This was well ahead of the corresponding period in
and secure income. The supermarket sector has always 2015 when £603m of assets were transacted, at a
featured the former but the major difficulties that it faced yield of 5.35%.
recently made UK institutions – traditionally the major buyers 2017 Transactions by Purchaser 2017 Transactions by Vendor
The second half of 2017 registered another £693m of
in the sector – take a standback. They are now emphatically
deals to take total volume for the year to £1.42bn –
back in the market.
an increase of 18% on 2016.
Rising transaction volumes PropCo 38.44%
Value slide arrested
Institution 38.09%
The volume of investment activity in the sector peaked in Institution 31.84%
The supermarket investment market had seen a slight
2013 at £1.8bn. This was just prior to the ‘race for space’ Other 8.75%
reduction in values between 2015 and 2016 as the Retailer 18.54%
unravelling and the aggressive expansion of the discount
operators struggled with new market conditions, but PropCo 52.81%
operators. Concerned over price-cutting, falling margins Other 9.71%
renewed confidence has seen this trend arrested.
and the cost implications of large store estates, investors Retailer 0.35%
Overseas 1.47%
voted with their feet and by 2015, volumes had tracked Yields for prime supermarket assets have come down
down to just under £1.2bn. to 4.25% while secondary assets are trading at 5.50%+.
Supermarket
£2,000,000Transactions 2010 - 2017 70 Value slide arrested - yield trends
£1,800,000
60 Average 20 Yr RPI Supermarket Yield Average 10 Yr UK Gilt Yield
£1,600,000
5.50
£1,400,000 50
5.00
Total Capital Value (£)
Number of Transactions
£1,200,000
40 4.50
£1,000,000
4.00
30
£800,000
3.50
NIY (%)
£600,000 20 3.00
£400,000
2.50
10
£200,000
2.00
£0 0
1.50
2010
2011
2012
2013
2014
2015
2016
2017
1.00
Sainsbury's Morrisons Asda Tesco Waitrose M&S Other Total 2010 2011 2012 2013 2014 2015 2016 2017
14 UK S U PERM ARK E T INVES T MENT REVIEW 2 0 1 8 15MARKET-MAKING DEALS INVESTMENT
MARKET
OUTLOOK
Property Date Comment
In February, Legal & General sold a
Milton Keynes 43,582 sq ft Waitrose store to Surrey
February 2017
Waitrose County Council for £28.95m, 4.25%
NIY.
Knight Frank Investment Manage-
Confidence has returned to the supermarket sector; and
ment’s £22m forward funding of the
we expect transactional volumes in the investment
development of a new Sainsbury’s in
South Woodham Ferrers market to be similarly progressive. There is still no sign
April 2017 South Woodham Ferrers reflected a
Sainsbury’s of rental growth outside London, but we are starting to
5.25% yield. The store is let on a new
25-year lease with fixed RPI-linked see some signs of stability in the occupational markets.
uplifts. The average lot sizes of investment deals are lower and
institutions are being highly selective on the basis of
A newly developed Aldi store in
Bedford income and assets. The lack of prime stock will continue
April 2017 Bedford was sold in April to AXA Real
Aldi to be an issue, but there should be plenty of secondary
Assets for £7.50m, a record 4.30% NIY.
product available. As a consequence, more investment
Sandhurst Sold by ICG Longbow to CBRE GI for will be flowing into the secondary market and it will be
May 2017
Waitrose £7.75m reflecting a 4.35% NIY. acquisition is steering a course through any interesting to see if this narrows the yield gap between
competition objections and is being seen as a prime and secondary assets to a point which is
Kettering Acquired by Legal & General for £51m,
August 2017 good broadening of the business’s estate, unrepresentative of their respective strengths.
Tesco 5.85% NIY.
especially in the context of online fulfilment.
From a more macro point of view, Amazon’s acquisition
Acquired by Atrato Supermarket REIT Getting shopping that has been ordered online of Whole Foods which completed last August may just
Ashford for £80m reflecting 4.50% NIY. Large
August 2017 delivered to customers remains a major be a forerunner of what is to come in the UK
Sainsbury’s store of 124,348 sq ft, annual RPI
headache for operators. Whilst supporting supermarket sector. While Amazon is getting its offer
linked reviews with 21 years unexpired.
brand loyalty, it is a loss leader for the together, Alibaba is building a grocery model in China
Sold by the British Land / Sainsbury’s supermarkets. However, some are now which could be rolled out worldwide. Its Hema grocery
South Woodford combining the desire to have less sales concept has been two years in the making and provides
December 2017 JV to LaSalle for £36.75m at a sub-
Sainsbury’s floorspace with the need for online fulfilment
4.00% NIY. a new concept in online and offline grocery shopping
capacity by converting areas of existing stores with an integrated paying platform. A small but vivid
into pure logistics space. example of how different Hema is from its western
counterparts is that its customers are able to choose a
Making the grade enhanced and broader based approach to In this vein, it is now becoming apparent that the
live lobster online, have it cooked in a specific way by
investment in the sector. debate about store size is becoming less pivotal
The supermarket property investment market is Hema before it is delivered to their home.
to the sector. As operators look to repurpose their
now increasingly focused on assessing the quality Not just bananas and bread
existing estates, having the ‘wiggle room’ to Last year saw major consolidation in the shopping mall
of individual stores and the income which flows
Challenging market conditions have not left the dedicate part of what had previously been sector and the prospect of something similar in the UK
from them. With investors simply looking to buy
major operators much elbow room to look at thought an oversized store to online fulfilment can supermarket world is not beyond imagination.
income, the grading of revenue is of primary
diversification into higher margin retailing offers, be something of a silver lining.
importance. In terms of corporate activity, Tesco-Booker may not be
but the Sainsbury’s/Argos tie-up has proved to
Similarly, whilst investors retrenched to London the last of the lateral hook-ups between supermarket
Similarly, investors should be looking more closely be popular with shoppers despite initial
and the South East while the sector was operators and other businesses. There is definitely more
at the demographic setting of each store and the scepticism from City commentators. Sainsbury’s
embattled, it is now clear that many regional scope to explore how the supermarket business can
provision of supermarkets in that area. is now looking at further collaborations although
assets are performing strongly and, in some work with third-party logistics operators for mutual
it is unlikely they would involve full scale
Through our Vitality Index (see page 13) and our instances, provide better value to buyers. benefit - and this could extend beyond just the existing
acquisitions as per Argos. Tesco’s Booker
analysis of income quality, we are taking an core relationship of putting food on shelves.
16 UK SU PER M ARK E T INVES T MENT REVIEW 2 0 1 8 17TESCO-BOOKER MAY NOT BE
“
THE LAST OF THE LATERAL
HOOK-UPS BETWEEN
SUPERMARKET OPERATORS
AND OTHER BUSINESSES
”
18 UK SU PER M ARK E T INVES T MENT REVIEW 2 0 1 8 19FOR MORE INFORMATION, GET IN CONTACT James Watson Head of Retail Capital Markets +44 20 7344 6877 james.watson@colliers.com Matthew Hobbs Head of Retail Lease Advisory +44 20 7344 6843 matthew.hobbs@colliers.com Matthew Thompson Associate Director | Retail Strategy +44 20 7344 6817 matthew.thompson@colliers.com Colliers International 50 George Street London W1U 7GA colliers.com
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