Super Growth from Supermarkets?

In a difficult 2 year period for the retail sector, one market has proven especially resistant to the impact of Coronavirus.

Supermarkets/convenience store are an investment class that has continued to grow and flourish during the past 2 years. Alongside medical/care and industrial/logistics, it has become one of the most popular sectors for property investors.

Banks Long & Co has played an active role in supermarket acquisitions and disposals over the last two years. Director James Butcher, of our Commercial Property Agency and Development & Investment Consultancy, details what this emerging trend means for investors and sellers…

Why supermarkets are a popular option for investors

COVID-19 has had a huge impact on the retail sector. Unsurprisingly, the last 2 years have seen the largest fall in total retail sales ever recorded, with shops forced to shut as many consumers were forced to stay at home during lockdown.

The pandemic came at a time when many retailers were already losing out to ecommerce and changing shopping habits. Several big brands have struggled to survive, with Debenhams, DW Sports and Landlords, Intu Properties one of the largest Shopping Centre Landlords, all going into administration over the past 18 months.

Investors have been eager to invest their capital in COVID-resistant assets during what many have described as a turbulent time for retail. There are very few, if any options that tick that box more than the supermarkets/convenience stores as an investment class.

Supermarkets and Convenience Stores are one of the very few areas of retail that have been allowed to stay open and continue trading throughout the whole of the pandemic as they were classified as essential retailers, so avoided lockdown closure. While bars, restaurants and the vast majority of other retailers closed, the likes of Morrisons, Tesco and Sainsbury’s recorded sales growth of 13.1%, 11.1% and 10.7% respectively.

In December 2020, UK supermarkets recorded their busiest ever month, with sales totalling £11.7 billion and at the end of last year total sales were over 7% higher than they had been prior to the pandemic in 2019.

Banks Long & Co’s involvement

Banks Long & Co’s experience in convenience store/supermarket sales and acquisitions has enabled us to capitalise on this busy period, to sell and acquire various stores on behalf of our clients.

In the last 24 months, the firm has been involved in numerous supermarket deals, involving operators such as Tesco Express, Co-op, Sainsburys and Spar with a combined value of close to £15 million. These investments have been located throughout the Midlands, East Anglia, Greater Manchester and South Yorkshire, making full use of the extensive knowledge and contacts of our investment team.

An example of one of these successful transactions, Banks Long & Co sold a convenience store in the East of England last year off a yield of just over 5% which represented an increase of well over a million pounds from what our client had originally paid for the property some years previously.

As a firm that is very active in the wider property investment markets, they are well placed to take advantage of swings and trends in the various sectors.

Why are investors buying?

The Development & Investment Consultancy team provides a first class investment service  involving both the acquisition and sale of individual properties and portfolios.

Supermarkets and convenience stores as a use class provide an attractive and safe investment in the current economic climate, offering returns of 5% plus via the rental income paid by some of the most profitable companies in the country, a yield/return that is much higher than provided by the average bank savings account, as well as the majority of other investment vehicles at the present time. The leases will often incorporate fixed rental uplifts at rent review, linked to RPI/CPI, which protects the Landlords income against the impact of inflation, something that we are all to aware of at the present time, with inflation rates at their highest in a generation. They also tend to fall within a lot size that is popular with a lot of private investors.

The increased demand in the sector has led some clients to sell their investments, having purchased them when the market wasn’t as strong as it is now, to realise a significant capital receipt, as per the example above. Our team have been able to guide these sellers to capitalise on the strength of the market while values are at their peak.

Money to be made…

More often than not in a recession, there is freeze on the availability of funding. But that has not been the case over the last 2 years. There are a lot of investors with money which they are looking to spend and are wanting solid, reliable ways in which to invest it. 

Despite two recent increases in Interest rates over the past couple of months, as the Bank of England attempts to control the record inflation levels, the base rate of 0.5% is still exceptionally low by historic standards and looks set to stay low for a long time. With supermarket and convenience store investments offering returns around 10 x higher than interest rates, it is not difficult to see why they are proving to be a popular investment.

Values are driven by lease terms and the financial strength of the tenant, with many new convenience store leases stretching over 15 years, with rents linked to RPI. This means investors will get a guaranteed uplift every five years, removing the need to negotiate with the tenant and ensuring a better return. 

What are the other strong-performing sectors for investment right now?

It is the responsibility of our Development & Investment Consultancy Team to keep a close eye on emerging trends and markets. Our activity in the market shows that the three sectors  that have performed strongly over the last 18 months are:

• Supermarkets and convenience stores
• Medical /Care
• Industrial/logistics - particularly large-scale manufacturing and distribution hubs that have been driven by the growth of the internet.

Keeping a close eye on the market

The advice from our Development & Investment Consultancy team is built on an understanding of the market at a local, regional and national level. This expertise has been acquired and refined over many years of working in the market, making sure that our clients are matched with an investment that ‘ticks the right boxes’ for them in terms of:

• Their underlying Investment criteria (in terms of yield profile, risk/return and potential for longer term capital growth.
• Demographics
• Population

Awareness of future market trends - alongside a deep understanding of the market and  economy, at both a macro and micro level - helps Banks Long & Co identify the right investment opportunities for our clients.

Our team has a number of retained clients and a wide database of other investors who have an ongoing requirement for supermarket/convenience store opportunities throughout the country. The wide range of potential buyers means Banks Long & Co can often sell a property without it going to the wider market, targeting specific buyers with the capital to proceed without outside funding and who are therefore in a position to move very quickly towards an early exchange and completion.

Looking for investment advice and opportunities?

Banks Long & Co provide advice drawn from a unique in-house pool of accurate, up-to-date market knowledge. For guidance, support and advice, don’t hesitate to get in touch.