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Enhanced rental growth set to be key driver for supermarket investment performance.

International real estate advisor Savills has predicted in its latest Supermarkets research report that this sector is set to buck the trend with rental growth proving the strongest driver of future investment performance.

Enhanced rental growth set to be key driver for supermarket investment performance.

The report states that while the global economic challenges and subsequent retail failures have seen retail rents as a whole fall by 6.1% since August 2008 according to IPD, supermarkets have continued to report an upward growth of 4.6% during the same period.

Chris Blair, national head of retail at Savills, comments: “The continued competition in the supermarket sector between the leading operators to secure the right location, combined with a more receptive approach to leasing from these occupiers, has helped to generate upward rental pressure. Furthermore, overall supermarket rental growth has generally fallen behind the curve compared to the rest of the retail sector, which indicates that there is still potential for further growth moving forward.”

As part of its research, Savills investigated the potential for further rental growth by modelling turnover for a number of supermarkets and a matched sample of retail warehouse stores, where rental data was available.  While it is noted that the running costs for a supermarket can be significantly higher than other types of retail operation, the difference in rent as a proportion of turnover between the two sectors (3.1% for supermarkets against 12.5% for retail warehouses) suggests there is capacity for further rental growth.

Savills advises that sustained supermarket rental growth, combined with the strength of operator covenants and long lease terms, will continue to drive investor appetite for supermarket assets. This is supported by signs of yield hardening emerging in the sector with IPD quoting that initial yields have hardened by 8bp since June this year to 6.78% in August. By the end of the year, Savills expects a further downward shift of approximately 25bp.

Mark Garmon-Jones, investment director at Savills, says: “The fall out in the commercial property market has resulted in investors refocusing their attention on ‘prime’ assets with 10 or more years secure income, minimal over-renting and no voids. The strong trading performance of supermarkets and their commitment to locations means that they fit the bill.  As a result, for the more attractive assets, we have seen offers in the region of 5.25%. 

“In addition, we have started to see operators capitalise on this renewed investor appetite by releasing capital from their property portfolio in sale and leaseback agreements. The Sainsbury’s deals over recent months are a prime example of this with achieved yields averaging at 5.75% and buyers ranging from private investors to traditional funds.”

In terms of overall success Savills report notes that, as with the previous recession of the early 90’s, food stores have continued to report sales growth with both Morrisons and Sainsbury’s showing a 7.8% increase in like-for-like sales (excluding fuel and VAT) during 2009/10*.

One area look set to continue its expansion is convenience stores, particularly with the recent announcement from Waitrose to augment its presence in this area.  Marie Hickey from Savills research comments: “The competition to maintain and enhance market share means that the expansion of convenience store formats looks set to continue. As these formats are largely dependent on leasing space, it will be this section of the market that will offer the best opportunities for landlords and investors to enter the sector, particularly as operators continue to expand their portfolios.”

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