2012 saw more than GBP1.2bn of UK supermarket assets changing hands last year, as investors sought to lock into long-term, index-linked income, according to the latest IPD/Briant Champion Long UK Supermarket Investment Report.
Last year, UK institutions accounted for 90 per cent of all supermarket investment purchases.
The lacklustre performance of the bond market is driving an increasing number of UK institutional investors, particularly annuity funds, to buy supermarket property investments that can offer the returns and security of income that institutions require.
Acquisitions now reflect net initial yields of around 4.5 per cent but it is the perceived security of income, underpinned by consumer spending, which is of greatest attraction to investors. The average unexpired lease term on a supermarket is over 22 years, compared with just 13 years in the general retail sector.
IPD analysis of GBP4.9bn of supermarket assets showed that returns in 2012 averaged 6.1 per cent, while standard shops only delivered 2.4 per cent. In the five years since the downturn, supermarkets have returned 6.9 per cent pa against retail at 1.3 per cent pa, showing that prime supermarket yields are now equivalent to those being achieved by the best central London office assets.
James Watson, head of investment for Briant Champion Long, says: "The depth of investor demand, particularly from annuity funds, is profound and there is no sign of this abating. The market is being dominated by institutions, which last year accounted for 90 per cent of all purchases.
"As funds look for continuity of income, there continues to be a clear investor preference for assets with RPI-linked rent reviews, rather than those let on leases with ‘open market’ reviews.
"The supermarket sector is also less vulnerable to internet shopping compared to other retailing models, as it is very unlikely that this form of shopping will ever shift entirely to online."
Unlike the demand for general UK commercial property investments, there is less of a north-south divide in the supermarket investment sector with assets across the country attracting similar levels of interest and pricing.
Greg Mansell, head of research for IPD, says: "2012 may have been seen as a year for ‘safe haven’ investors, but we have seen an increasing focus on lease length and tenant quality, rather than location.
"Supermarkets have benefited from incredibly strong consumer demand, which makes their operators stable, profitable, and willing to sign up to new 25-year leases in locations across the UK."
According to a Payment Council report, 58 pence in every retail pound is spent in supermarkets, up from 46 pence a decade ago. This level of demand underpinning the sector means investors can be confident in their future income streams.
In the retail property investment sector, supermarkets have been one of the few areas to experience rental growth and offer stability. In the IPD rental information service, three of the ‘Big Four’ operators (Tesco, Sainsbury’s, Asda and Morrisons) are in the Top 10 of the most secure tenants.
Major operators are now less focused on non-food retailing and are building fewer of the "mega-stores" (100,000 sq ft+) of recent years. While large stores are still being developed, expansion strategies are increasingly focused on the smaller, convenience-style stores. This trend was recently illustrated by Morrisons acquiring 62 stores from Blockbuster, HMV and Jessops failures, for its new "M Local" convenience store format.