As we move towards the end of 2019, we leave behind us another year of twists and turns in the retail property market. While the overall European retail investment market has seen a slowdown (down 27 per cent year-on-year according to Savills), largely thanks to the rise of ecommerce, we have seen the dominance of a trend which transcends wider woes in the market: sale and leaseback (SLB).

Approximately €2.2 billion of retail properties were sold and leased back over the course of the past 12 months*. So far this year, retail SLB has accounted for approximately €1.7 billion (11.1 per cent) of the total retail investment volume, a record high since 2007 (11.3 per cent). This is equivalent to the amount recorded for the full year last year and 30 per cent above the average of the past 10 Q1-Q3s.

In terms of country spread, more than half of the retail SLB was concentrated in the UK (39 per cent); France (34 per cent), Spain (13 per cent) and Poland (8 per cent) accounted for a fifth of the total retail SLB volume recorded since the beginning of the year.* If we look more closely at these stats it quickly becomes clear that this model of investment is most popular with supermarket retailers who have largely driven the overall trend, representing 60 per cent of the retail SLB investment volume transacted so far this year.*

In the face of the rising tide of ecommerce, some retailers need to rationalise and consolidate their units. SLB is a great financial strategy to take capital out of real estate assets and put it back in the core retail business.

Examples of supermarket retailers employing this strategy include mega deals such as the SLB of the Sainsbury's supermarket portfolio in the UK by Realty Income for over €500 million, the Casino supermarket portfolio in France to Fortress Investment Group for €392 million, and the Metro portfolio of 11 properties located in Poland, Czech Republic and Hungary bought by FLE Gmbh from Metro group for approximately €249 million.

Can we expect to see this trend continue into 2020? With ecommerce set to see further growth across Europe, SLB could be one way to keep buoyancy in the sector.

Overall the retail market was also underpinned by repricing and redevelopment opportunities in the largest markets. So far in 2019 the average gross initial yield achieved is 10 basis points higher compared with last year at 6.3 per cent, a reflection of both the softening trend in retail yields as well as the rising number of value-add type of transactions. 

Further yield softening is expected in the sector and we forecast prime retail yields to move out over the next 12 months in Belgium, Czech Republic, Ireland, Norway, Portugal, Spain and UK markets.

* Figures from Real Capital Analytics

Further information

Read more: Spotlight: European Investment