Real Estate’s Latest Trophy Assets Are in Short Supply

Real Estate’s Latest Trophy Assets Are in Short Supply

Unlikely as it may sound, grocery stores are becoming dream properties—coveted but hard to prise away from their owners. Changes to accounting rules are just one reason why it has become less appealing for supermarkets to sell their real estate.

In Europe, food shops have been among the few retailers allowed to trade throughout the pandemic and business has been strong. U.K. grocer J Sainsbury reported Thursday that over the nine weeks to Jan. 2, sales increased by 9.3{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb}, sending its shares up 4{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb}. Britain’s supermarkets have had their highest Christmas sales on record, based on data released this week by Nielsen.

That strength has fed through into real-estate markets, where superstores are in demand. Landlords haven’t struggled to collect rents from grocers as they have from other retailers. U.K.-listed

Supermarket Income REIT

received 100{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} of rents owed in the three months through September, compared with just 79{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} for Europe’s biggest shopping mall landlord,


The former’s stock is roughly flat over the last 12 months, while Unibail’s has more than halved in value.

Growing competition to buy grocery stores is already nudging up prices. European prime supermarket rent yields tightened to 5.63{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} by the third quarter of 2020, according to


data, compared with 5.67{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} at the end of 2019. In contrast, the yield on prime shopping malls moved out over the same period as investors grew jittery about future cash flows.

For investors such as U.S.-listed Realty Income, which has been trying to build a portfolio of grocery stores in Britain, supply of the best assets could remain tight. Supermarket giants like Carrefour and


have property worth billions of dollars on their books. But selling up is less appealing today than it was during the big wave of deals in the 2000s.

Back then, selling a store and leasing it back was a good way for grocers to get their hands on finance without it showing up on their balance sheets. Proceeds were often used to fund expansion plans, such as Tesco’s ill-fated push into the U.S. But new accounting rules brought in with IFRS 16 from 2019 mean that leases must be treated as liabilities, increasing grocers’ leverage ratios.

Europe’s supermarket giants may also be less in need of cash now. Other than German discounters Aldi and Lidl, few are in expansion mode. In certain markets, it makes more sense to buy back stores than to sell them. Supermarket rent reviews are often linked to inflation, so purchasing property is a way to get a better grip on costs. Tesco recently bought a number of stores and two distribution centers for this reason.

That said, some properties may end up on the block. Digital laggards will need cash to invest in e-commerce now that more consumers are doing the weekly food shop online. Spanish grocer


sold stores to U.S. investor LCN Capital last summer.

Unglamorous grocery stores are popular with investors, but not everyone can find shelter in the food aisles.

Write to Carol Ryan at [email protected]

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