Why supermarket chains are rethinking their real estate

Supermarkets are increasingly looking to sale and leasebacks as a way to unlock fresh capital amid COVID-19

September 09, 2020

Supermarket giants in Europe are ramping up sale-and-leaseback activity, as economic uncertainty encourages a fresh assessment of real estate portfolios.

Both stores and warehouses are being brought to market. In Spain, leading supermarket chain Mercadona earlier this year sold 27 properties to private equity investor LCN Capital Partners.

In the UK, a portfolio of Waitrose stores was picked up in July by Supermarket Income REIT, while LondonMetric Property took a further five Waitrose supermarkets in a sale-and-leaseback deal for £62 million. Waitrose signed new 20-year leases at the regional stores.

“Supermarket chains have been facing increased costs for some time as they adjust and reposition to long-term consumer shifts such as increased home delivery,” says Nick Compton, head of EMEA corporate capital markets at JLL. “So COVID-19 has really been an accelerating factor. The need for capital was already there.”

Across all sectors, wider disposal of corporate real estate rose 33 percent to €23.1 billion last year, according to JLL data. Retail and leisure saw the sharpest increase, with €6 billion of transactions taking place compared with €3.7 billion in 2018.

As retail stores across the world grapple with a changing landscape led by the e-commerce boom, many are in need of additional capital to deploy new strategies, says Compton. “Supermarket management boards have much to think about.”

Off the back of growth in its online business, UK grocery chain Tesco has just announced it is creating 16,000 new permanent jobs, the majority being customer order pickers.

An increased global awareness of carbon emissions is another reason why grocery chains will require fresh capital in the coming years as they look to switch from diesel to electric delivery vehicles.

“Many larger stores are sitting on car parks and petrol stations which require rethinking and resizing,” says Compton. “While the growth of omnichannel and in particular, drive-in click and collect, is also impacting store configuration.”


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Resilient grocery sector

The grocery sector remains popular with investors who are looking to take advantage of unrelenting consumer demand for domestic necessities.

Overall grocery retail continues to perform well across all European markets and attract investors, says Mike Bellhouse, Head of EMEA retail capital markets at JLL.

“There’s good investor appetite for grocery retail at both a regional and individual market level,” he says. “We’re currently seeing a number of emerging opportunities in a market that has historically had limited quality stock - but now faces rapidly increasing investor demand.”

In Germany, supermarket giant Edeka sold four stores from its Minden-Hannover arm to Greenman Investments, a sector specialist which has previously invested in stores leased to most major supermarket chains including Aldi, Lidl, Netto and Rewe.

“The appeal of these portfolios really lies in the robustness and longevity of income, with rent reviews often linked to consumer price indices,” says Michael Evans, Corporate Capital Markets director at JLL. “Pension fund and institutional capital, as well as dedicated long-income focused funds, have long shown a particular interest in the sector.”

LaSalle Investment Management last year acted on behalf of behalf of French public service pension scheme, ERAFP, in a sale-and-leaseback deal of six Spanish Makro supermarkets. In June this year, German insurer Allianz recently teamed up with Charter Hall to pay supermarket giant Aldi around A$648 million for an Australian logistics portfolio.

The resilience of not only the grocery sector, but equally of warehousing and the supply chain, has been apparent over the past few months, says Evans.

“The logistics that support grocery retail are just as appealing as the stores themselves,” he says. “On the sell side, there’s fundamental changes in the distribution and warehousing of products.”

While, traditionally, special purpose vehicles and joint ventures have been an option for supermarkets looking to release real estate, such partnerships may be less appealing than sale-and-leaseback activity in the near-term, Compton says.

“SPVs and JV structures were popular as supermarkets sought to partner with property specialists to capitalise on development opportunities as well as raise capital, but it can be hard to completely align interests in such structures,” he says. “The desire to release real estate remains strong and over the coming months, more portfolios will be brought to market in major European markets.”

Contact Nick Compton

Corporate Capital Markets Director

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