It’s Tesco’s first major property deal outside the UK and the outlook for Lotus is buoyant, but Thailand’s volatility could sour prospects

Warren Buffett, may be going long on Tesco at the moment but what’s international investor appetite like for it outside Berkshire Hathaway?

Tesco will get a clearer indication when it floats a property fund on the Thai stock exchange next month. While its UK property sale and leaseback model is a well-oiled machine generating over £5bn in the past five years, the Thai deal is uncharted waters: it’s Tesco’s first major property investment offer outside the UK.

Pre-marketing for the IPO kicked off this month, with the fund containing 15 shopping centres anchored by Tesco Lotus, the Thai fascia operated on Tesco’s behalf by Ek-Chai Distribution System. It’s anticipated the share offer, which will see Tesco retain up to 33% of the fund with the rest open to institutional and retail buyers, will raise 14 billion baht (£300m).

The move is in line with Tesco’s property strategy, unveiled by CEO Philip Clarke at the prelims for 2010/11 in April last year. “We have successful mall businesses in Korea, Thailand, Malaysia and in our Central European markets as well as a newly developing mall business in China,” said Clarke. “The development value we create through these large projects will be increasingly realised through transactions in which Tesco sells, or part-sells, the whole development and leases back the hypermarket portion.”

In Thailand the retailer is deploying its property divestment strategy through a real estate investment trust (REIT), long established in Europe but only recently rolled out in Asia. There’s pent-up investor appetite for this type of vehicle and analysts predict domestically, at least, the IPO will be well received, with Lotus considered attractive thanks to recent rapid expansion - from just over 200 stores in 2006 to more than 900 (of which 133 are hypermarkets) in 2012 - and strong future growth prospects in Thailand.

But while the country is fertile ground for sales, it could face a struggle attracting overseas investors. Extensive floods last year caused sales growth in Asia to slow, while political unrest - including riots last year and a botched bombing last week - is accompanied by severe corruption. The Lotus website stresses its anti-bribery and corruption policy.

One investment agent experienced in UK supermarket sale and leaseback deals thinks investors from the retailer’s homeland will find it too risky.

“If I were a UK institution I wouldn’t be interested unless I had a specific Asian fund. People just don’t know the local market well enough and there are too many variables,” he says. “In the UK the food store market is much more mature and densely populated so you always know that even if the unthinkable happens and Tesco disappears, you can replace them with another chain.”

Another property investment analyst argues, however, that “certain investors will see this as an attractive investment since it provides the potential to diversify risk across the various national property markets. With the UK property investment sector still volatile, and supermarkets providing a safe haven, certain investors will be attracted towards developing nations such as China and Thailand where rental growth might outperform the UK.”

Global investor sentiment towards Tesco will be revealed next month when the IPO gets off the ground. In addition to providing a useful barometer of the retailer’s status in Thailand, take-up of the offer will also give a clearer idea as to whether or not Buffett’s gamble has paid off.