Home Newsletter Supermarkets are tough to come by for CRE investors

Supermarkets are tough to come by for CRE investors

A number of retailers have had difficulty staying financially afloat and paying their rent during the COVID-19 pandemic. Supermarkets have been the exception, making the properties difficult to pry away from their owners, The Wall Street Journal reports. Grocery stores are one of the few retailers allowed to trade throughout the pandemic and business has been steady. U.K. grocer J Sainsbury reported a 9.3% sales increase during the final nine weeks of 2020. Overall, Britain’s grocery stores had an all-time high in Christmas sales according to Nielsen data.

Commercial real estate owners have noticed that grocery stores’ revenue has remained steady during the pandemic, which has put them in high demand. Landlords have not had any trouble collecting rent from supermarket tenants compared to other retailers. U.K.’s Supermarket Income REIT received all of the rents owed in three months through September. Meanwhile Europe’s biggest mall landlord Unibail-Rodamco-Westfield only collected 79% of rents during that time, it has been reported.

Growing demand for grocery stores is good news for CRE owners

Many grocery store real estate owners aren’t interested in selling their property right now, but the ones that do are likely in for a good profit. The enhanced competition for these properties has only raised prices—prime supermarket rent yields in Europe closed to 5.63% by the third quarter of 2020, per Savills data, compared to a 5.67% yield during the same timeframe last year. Meanwhile, yields on shopping malls expanded at that time because investors became nervous over potential cash flow issues.

U.S. investor Realty Income has had its sights set on building a supermarket portfolio in Britain, but the supply isn’t meeting the investor’s demand. Meanwhile, supermarket owners like Tesco and Carrefour have billions of dollars of property on their books, but selling any of it isn’t as attractive a proposition as it was 10 or 20 years ago. New accounting rules have made it so leases are liabilities, which have increased grocers’ leverage ratios. Additionally, not as many of Europe’s big supermarket companies are in that much need of cash. Aldi and Lidl are just a few grocers that are currently expanding, according to The Wall Street Journal.

Depending on the market, it might be more financially viable to buy back grocery stores than sell them. There’s still a chance that some grocery store CRE properties could become available, however. The COVID-19 pandemic led to more customers doing their weekly food shopping online, decreasing the need for physical properties. Meanwhile U.S. investor LCN Capital managed to acquire stores from Spanish grocer Meradona last summer.

“In five years’ time — a typical holding period for private equity — investors may be more enthusiastic about grocery shares than they are today,” Andrea Felsted wrote for Bloomberg. “German discounters Aldi and Lidl probably won’t be opening as many new stores, making them less of a threat to mainstream grocers. Meanwhile, supermarkets should be well adapted to digital channels like online ordering and delivery. It’s not hard to see how a food retail investment could be offloaded through an initial public offering. “Alternatively, a financial sponsor could hold a grocer for the long-term and benefit from its steady cash flow. Or an owner could merge a supermarket with a higher-margin non-food retailer, such as B&M European Value Retail SA, as a way to boost profits.”

Joe Dyton can be reached at joed@fifthgenmedia.com.

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