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2nd June 2023

Investors Tuck into Food Stores as Inflation Bites

A Yield Gap Has Opened Up Between Stores Let to Morrisons and Asda Versus Their Less Leveraged Supermarket Peers
Food stores have not escaped the recent outward shift in property yields but many investors continue to favour the subsector for its long-term, inflation-linked income and previous resilience through economic downturns.

Spending on supermarkets and convenience stores rose above £350 million in the first quarter of 2023, a rise of 340% quarter-on-quarter and more than double the amount invested in the first quarter of last year. Annual investment volumes ticked up to £800 million, ending a seven-quarter sequence of declines.

Last quarter’s figure does not even include Supermarket Income REIT selling its interest in the Sainsbury’s Reversion Portfolio to Sainsbury’s for £430.9 million.

Key recent transactions include Pimco buying four Morrisons supermarkets from M&G’s Secured Income Property Fund for £109.8 million, reflecting a 6.7% yield anda 19% discount on the portfolio’s £135 million asking price.

The deal, which closed in February, suggests the investment manager sees value in Morrisons’ covenant after it bought a large chunk of the supermarkets’ debt last year.

The softer pricing of properties let to Morrisons and Asda, both of which were the subjects of debt-laden private equity buyouts, is anecdotally tempting buyers.

Another of this year’s larger investment transactions involved Aviva Investors, on behalf of Essex Pension Fund, acquiring an Asda superstore in Hayes from the British Steel Pension Scheme for around £31 million. The yield on that deal is thought to also be north of 6%.

Stores let to Aldi sit at the other end of the pricing spectrum. Its Weymouth and Bury St Edmunds stores were recently bought by private investors for £6.8 million and £6.6million, respectively, at yields just over 4%. The keen pricing likely reflected a combination of Aldi’s covenant strength and no or low leverage on the buyer side.

The German discounter has been rapidly gaining market share in recent times and last year replaced Morrisons among the ‘big four’ UK supermarket chains.

Food stores are likely to remain key targets for investors in the months ahead due their lower volatility than some other property subsectors coupled with their index-linked leases and grocers’ relatively strong financial results.

Properties under offer or on the market include a Sainsbury’s superstore in Glasgow’s Darnley area, which Legal & General is selling for around £45 million, and an Asda supermarket in Washington near Sunderland, which LCP brought to market earlier this month for £21.2 million.