Debt-fuelled sale & leasebacks are helping drive record levels of supermarket property deals.
An “exceptional level” of sale & leasebacks in 2023 was led by Asda and Morrisons as they sought to pay down debt and by Waitrose in funding its turnaround plans, according to Colliers.
The property consultancy’s latest Grocery Real Estate Report said sale & leasebacks accounted for 43% of grocery real estate deals in 2023, accounting for the “vast majority” of activity, in a shift away from the traditional dominance of institutions and property companies. In contrast, sale & leasebacks accounted for just 1% of activity in 2022, 0% in 2021, 7% in 2020 and 6% in 2019, according to Colliers.
A record £2.29bn of assets traded in 2023 “was primarily driven by operators looking to release working capital from their property portfolios and improve their balance sheets” through sale & leasebacks, said Pierre Kunkler, Colliers director of retail capital markets. It comfortably beat the previous record of £1.85bn in 2021 and marked a recovery from the £700m seen in 2022 amid high inflation.
However, the report said the “well-known” debt positions of Asda and Morrisons were spooking investors and causing the gap between the values attached to their supermarkets and Tesco’s and Sainsbury’s to grow.
Mark White, Colliers director of valuation and advisory services, said: “Whilst investors have always perceived a covenant differential between Tesco/Sainsbury’s and all the other grocery retailers, the last 12 months has seen that differential grow at the fastest rate I can remember. The impact of the high levels of debt now being carried by Morrisons and Asda are concerning property investors.”
The more positive view of Tesco and Sainsbury’s was being played out “in a yield differential being achieved by their property assets in comparison to the values attributed to Asda and Morrisons stores” said Kunkler.
He said average prime yields for assets on index linked leases were about 6%, but covenant differences among operators introduced a variance of between 75 and 100 basis points.
One of the “most striking deals of the year” was one The Grocer revealed was in the offing in June. It saw Asda raise £400m in December from Macquarie Asset Management in return for long-term ground rent payments on a portfolio of 55 stores. The arrangement was “outside the norm for the grocery sector” and “it will be interesting to see if it creates a template for similar transactions”, Kunkler added.
Waitrose stores, meanwhile, continued to be “highly sought after by investors,” said White, thanks their affluent locations promising good underlying value “should anything ever happen to the covenant”. It was evidenced by the sale & leaseback of 11 Waitrose stores just before Christmas, attracting “considerable interest” and selling at a yield of about 6% – “which is ahead of where a similar portfolio let to either Asda or Morrisons would currently trade”.
Looking ahead, lower interest rates were likely to improve yields and add value to store construction projects, which had been floundering amid soaring costs of labour and materials, the report said.
On Aldi and Lidl, Kunkler said their preference for freehold property meant a lower volume of transactions but strong trading meant “their assets remain highly sought after when they do come to market”.
The Grocer reported last month how Lidl was looking for £90m from investors to build a portfolio of supermarkets, which it would then lease back from them.
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