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Supermarket Values Misunderstood By Investors, Sector's Big Investor Says

Grocery occupiers Tesco and Sainsbury's are Supermarket Income REIT's main clients.

The institutional property investment market is mispricing large supermarket assets because of a misunderstanding about the key metrics of rental and capital values, according to the sector’s major specialist investor.

“Our belief is that the market is discounting too heavily for standalone supermarkets from retailers such as Tesco and Sainsbury’s, incorrectly believing that some stores are overrented,” Supermarket Income REIT Managing Director of Fund Management Robert Abraham told Bisnow.

He said that while a logistics occupier that wants to downsize can choose another similar facility in the same region, supermarkets are far more wedded to their long-term locations and therefore overall income should be the key investment driver.

“A supermarket operator may decide it wants to reduce its trading area from, say, 120K SF to 80K SF, but it generally does not have the same option about relocating because supermarkets are not homogenous and cannot simply move, as their customers come to expect them to be in their location,” Abraham said. “So rent per square foot is much less relevant as a metric. Rather, it is about the overall rent achievable.”

The specialist investor owns 73 stores in the UK, with a portfolio value of around £1.7B after selling its stake in a joint venture with Sainsbury’s in March 2023, which realised circa £200M. The company used the proceeds to pay down debt, given its expectations that property yields still had some way to go and that it was more effective to reduce its loan-to-value position.

The company's share price has dipped nearly 15% so far this year, although it has edged up circa 5% across the past 12 months, meaning it is trading at a discount to net asset value of about 18%.

“Our overall strategy remains to buy assets, and we now feel that valuations have bottomed out,” Abraham said. “With yields moving out to around 7% and debt available at about 5.5%, acquisitions make sense again. Last year, that relationship was the other way around.

“Both Tesco and Sainsbury’s are currently acquiring their space back, as the pandemic reinforced the important role of the weekly shop, so our strategy is to look at large omnichannel stores that are used by the retailer to fulfil their online orders as well.”

While retailers such as Aldi and Lidl have been successful, their smaller size and use of retail parks means it is easier for them to move and means they can take over properties such as old car dealerships, which makes them riskier for a landlord, Abraham said.

Because of the specifics of the sector, Supermarket Income REIT considers each investment on a case-by-case basis. With supply constrained, it made its first move outside the UK earlier this year when it bought a portfolio of Carrefour stores in France.

“Carrefour felt as an occupier like a very similar profile to Sainsbury’s and Tesco,” Abraham said. “The 17 stores were an average of around €4M each and had a total value of €75.3M, diversifying our risk with a yield of 6.3% and euro debt at about 4.5%. Currently, this represents about 4% of our total portfolio value, and it’s something we will be looking to grow.”

In terms of adding value to its UK properties, Supermarket Income REIT has not looked at building residential on any of its large supermarket sites, but Abraham said that it had explored some other opportunities, such as quick-service restaurants and electric vehicle parking and charging, plus complementary retail. 

“For sites on retail parks, we’ve also looked at introducing an Aldi or Lidl store, which may sound counterintuitive but in fact increases footfall for the main supermarket,” he said.