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CBRE comment: Food for thought


Everyone is aware of the rapid growth of supermarkets in the UK in recent years, but is it set to continue? Mike Dickinson, Senior Director - Retail Capital Markets at real estate group CB Richard Ellis, explains to Retail Gazette how the major grocers are playing an increasingly prominent role in the commercial property market.

Did you know that supermarkets have been the best performing sector in the commercial property market over the last three, five and ten years? (It is also a very close second to retail warehousing over a 30-year period – according to Investment Property Databank (IPD).

The IPD Annual Index shows that supermarket investment has seen both lower volatility and has outperformed the market. With relatively long leases, strong covenants, good planning consents and strong rental growth potential, foodstore investment has performed well in good market conditions, yet has also proven to offer defensive qualities during the recent economic downturn. It is an investment sector that has come a long way since its infancy in the late 80s / early 90s and now accounts for seven per cent of the IPD All Retail Index.

Total Return (annualised to December 2010) over the last:

3yrs: Standard Shop -1.1% Retail Warehouse -1.0% Standard Office -2.8% Standard Industrial -3.5% Supermarket 6.5%

5yrs: Standard Shop 1.0% Retail Warehouse 0.2% Standard Office 2.5% Standard Industrial 0.6% Supermarket 6.6%

10yrs: Standard Shop 7.3% Retail Warehouse 8.3% Standard Office 6.0% Standard Industrial 6.7% Supermarket 11.6%

30yrs: Standard Shop 9.4% Retail Warehouse 12.0% Standard Office 8.3% Standard Industrial 10.2% Supermarket 11.9%

We are now in a market where just two retailers, Tesco and Asda, already have a joint grocery market share of almost 50 per cent. Add Sainsbury’s and Morrisons to this and the market value total reaches over 75 per cent. As a nation, we are now heavily reliant on these four operators, and their growth is likely to influence future investment performance, even though a large proportion of stores are owner occupied. Looking forward, this growth will be an important driver of the food store market, especially considering the additional stock it will provide to potential investors and new rental evidence.

Some of the main points to consider:

Development Pipeline – Annual construction activity is expected to be in the three to four million sq ft band for the next two to three years. This is approximately twice the retail warehouse park pipeline for the same period. Whilst a large proportion of this space will be developed for owner occupation, there will also be a significant amount of new lettings also coming onto the market, to create new rental evidence and a pipeline of investment stock, especially via development fundings and forward commitments.

Rental Growth – CBRE is predicting annual rental growth of 4.1 per cent per annum over the forecast period 2011 to 2015.

Changing Shopping Patterns – Food retailers are continuing to capture a greater proportion of consumer food and non-food expenditure. With a sharp decline in the supply of both new space and speculative developments in town centres and retail parks remaining constrained, it is likely that food operators will exploit the fact they are on the expansion trail and capture a larger proportion of household spend. Verdict Research predicts that by 2014 supermarkets will take 44 per cent of total retail spend – up from 37.7 per cent in 2004.

A further advantage food retailers have is that they are occupying stores that usually benefit from unrestricted retail planning consents. This provides flexibility and a greater ability to adapt store formats and product ranges, depending on consumer demand and shopping patterns at the time. CBRE estimate that there is currently 50 million sq ft of food store space currently allocated to generally higher margin non-food goods (equivalent to 30 Bluewater Shopping Centres). To put this into perspective, the total supply of non-food retail warehousing for the whole of the UK (excluding food stores) is just over 170 million sq ft. Therefore, as the food retailers continue to broaden their offer, shopping patterns will lead consumers increasingly to the dominant food stores - to the detriment of some existing high streets and retail parks. For example, we now buy more childrenswear from supermarkets than anywhere else and some food retailers have recently announced the introduction of footwear concessions and beauty salons into stores.

Rental Anomaly – When looking at the out–of-town-market, and comparing with non-food retail warehousing, food stores generally have higher build costs and lower site densities, coupled with unrestricted retail consents. For example, if you wanted to hire a car with a faster engine and air conditioning - you would expect to have to pay more; however, there does not seem to be a similar link between food and non-food rents – this is something that should have a stronger correlation and it remains to be seen whether the market will let landlords take advantage of this.

In conclusion, food stores are becoming increasingly dominant in the retail market - both in terms of consumer shopping patterns and as part of an investment portfolio. I am positive about future performance but, as is often the case, there can be divergence in performance with stock selection remaining the backbone to future investment returns. With the occupational market dominated by a limited number of tenants, the approach to stock selection needs to be different to the non-food arena.

To improve the chances of outperformance, investor watch-words should include “trading levels”, “dominance” and “obsolescence”.

Published on Tuesday 07 June by Editorial Assistant

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