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Supermarkets on the shopping list

April 29, 2021

Union Investment’s Places and Spaces Magazine 01/2021

Sale-and-leaseback deals for supermarkets have soared in Europe following the outbreak of the Covid-19 pandemic.
By Judi Seebus

“Supermarkets across Europe have continued to trade during all the lockdowns we’ve been through and the performance of their online business has also been fantastic. Really, they have been the winners twice over,” Colin Campbell, CEO of European retail specialist Pradera says. European grocery asset transaction volumes, driven by SLBs and increased investor interest, jumped by 43 percent to €6.7 billion in 2020, equal to a 22 percent share of the capital flows into retail real estate in the region. This is almost three times the figure for 2016/17. In comparison, overall retail real estate investment volumes fell 21 percent during the first nine months of last year, according to recent research by advisor JLL on the European Grocery Real Estate Market conducted together with Union Investment.The last major peak in sale-and-leaseback opportunities was in the aftermath of the Global Financial Crisis when a number of retailers sought to recapitalise via this route. That trend is emerging again, the JLL report concluded. While private equity players dominated the first wave of SLB deals a decade ago, institutional investors are now becoming more active as well, Pradera’s Campbell says. “In recent years we’ve seen the rise of infrastructure as an asset class, giving institutional investors access to toll bridges and other types of assets with long-dated inflation-linked income. Supermarket properties are probably the nearest you can get in real estate to such a classic high-yielding income play. They’re an ideal asset for an institutional portfolio.” Germany and the UK are the largest markets, but they are also quite expensive, he adds. “There are better opportunities in southern Europe, in particular Italy and Spain. There is not an endless supply and the market is becoming more competitive, but this is quite a good moment for sale-and-leaseback transactions.”

Supermarket assets are an ideal asset for an institutional portfolio

Campbell points to the six hypermarkets, with 21-year inflation-linked leases, that Pradera acquired in northern Spain at the end of 2020 for almost €130 million in SLB deals on behalf of German pension fund Nordrheinische Ärzteversorgung (NAEV), as an example of this trend. “This is the long end of the lease spectrum outside the UK. Standard lease lengths vary across Europe and, in some other countries like France, are often significantly shorter and therefore less attractive,” Campbell said.

The boom in grocery SLB deals in 2020 was fuelled by solid asset valuations as social distancing and lockdown measures channelled consumer spending into daily staples and away from discretionary retail stores and the hospitality sector. The spike in grocery sales volumes from stockpiling and the closure of restaurants was a big boost for Europe’s largest retail sector in terms of revenue.

Over the last 20 years, the food sector has recorded stronger growth in most European markets than other areas, such as fashion. Nevertheless, supermarket margins still continued to be squeezed. Many grocery retailers took a hit to their profits from substantial costs linked to the need to hire extra staff to keep stores stocked and implement safety measures in response to the virus.

The pandemic has also unleashed a massive surge in online shopping, fuelling the further development of distribution channels, such as click-and-collect service points. Supermarkets  have so far lagged other shopping segments in generating e-commerce sales and creating an omnichannel, or integrated physical store and online offering, but Covid-19 has also accelerated this trend in grocery retail.

Supermarket chains are benefitting from higher levels of footfall during the pandemic, but these retailers will need to strongly focus on protecting store margins as sales growth moderates after the crisis passes, the JLL / Union Investment report said. Structural changes prompted by the ascent of discount retailers and smaller convenience stores in urban centres are also creating additional pressures to optimise store performance and the European grocery market is expected to see further consolidation and merger and acquisition activity in the coming years. Domestic investors have historically accounted for the lion’s share of supermarket assets, Tjard Martinus, Head of Retail Research EMEA at JLL, says: “This type of investor traditionally knows the market inside out and usually has the scale to make it work. Because they are generally committed to these types of properties for the long term, they are also very familiar with the potential for alternative uses such as residential or last-mile logistics.”

 

 

Increased investment expected in the coming years

While grocery stores attract 37 percent of the total retail spend in the EU (27 countries), according to data from Eurostat, property investment in this segment accounts for only 10 percent of Europe’s overall retail real estate volumes. In other words, real estate investors appear to be under-allocated towards supermarket-anchored assets. That will change in coming years, Martinus predicts.

“There is a window of opportunity for foreign investors to access core product and gain scale quickly, for example through sale and leasebacks. In some European markets, grocery operators prefer leasing space over ownership and further merger and acquisition activity could trigger the sales of the property portfolios of newly acquired grocery businesses. Specialist investors currently working out value-add portfolios are also likely to provide more quality stock to the market upon exit. We expect to see elevated levels of investment for the next couple of years, in particular in Germany and the UK. Those markets also offer the best opportunities to gain scale,” he says.

The expedited need for additional financing has coincided with a renewed investor regard for supermarkets as a real estate asset class. Good-quality grocery stock provides portfolio diversification opportunities, Martinus concludes. “Supermarkets are a high volume/low-margin business, but in times of uncertainty, their resilience and defensive characteristics appeal to investors and the Covid-19 pandemic has accelerated that favourable perception.”

High costs and lengthy delivery times of online food sales buffer brick-and-mortar grocers

Online sales in the food retail sector have jumped since the Covid-19 pandemic but the spike comes from a very low base and existing barriers to e-commerce penetration will persist and ultimately shield brick-and-mortar stores, according to Henrike Waldburg, Head of Investment Management Retail at Union Investment (pictured). “Some customers will make more use of online shopping in food retail in the long term if their experience has been positive during the pandemic, but the costs of online shopping are very high in the perishable goods sector due to the complexity of supply chains and the need for separate cooling zones. Many consumers are simply unwilling to pay for higher transport costs or may have doubts about the freshness and quality of food purchases made online,” she argues.

The food sector is the largest retail segment in Europe with revenue of some €2 trillion in 2019 but has so far lagged other retail segments in terms of e-commerce penetration. Online food sales accounted for just 1.4 percent in Germany in 2019 compared to 15.8 percent for the non-food sector and as much as 33 percent and 30 percent for consumer electronics and fashion respectively, according to recent data from HDE Online Monitor.

Retail sectors such as fashion are reporting lower offline sales as the process of consolidation gathers pace following the pandemic, but food retailers are still on a growth path and many are seeking to expand their physical presence. Industry forecasts point to further long-term stable growth for the coming years, rising to around 1.2 percent annually between 2022 and 2026 for the EU-27, according to Oxford Economics.

Supermarkets are often anchor tenants in Union Investment’s retail portfolio thanks to this favourable growth trajectory and their ability to generate strong footfall and high-frequency sales, Waldburg adds. “Grocery chains generally have good credit ratings, operate on the basis of long-term rental contracts and generate stable rental levels. How much consumers spend on food ultimately depends on their disposable household income, but the supermarket sector has proven during the Covid-19 pandemic that it is crisis-proof.

By Judi Seebus

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