Like much of the investment market, transaction volumes in the grocery market saw a significant dip in the second half of 2022, with Q4 volumes down 78.5 per cent on the 10 year average.

However, despite ongoing headwinds, investor appetite returned to the sector in 2023, with Q1 volumes reaching £993.4 million - a figure which already exceeded the full year levels of 2022 by 3.9 per cent.

So what has been driving this resilience and has it continued when some of the wider investment market continues to face challenges?

Underpinning the market are the strong fundamentals of the sector. Lease tenures tend to range from 15-25 years, equipped with upward-only rent reviews. This provides buyers with long-term secure investment opportunities, while strong tenant covenants offer an element of security. This continues to suit long leased funds and institutions, which remain particularly active in the sector.

Sale and leaseback activity has also picked up pace this year, following the acquisition of Morrisons in 2021 and the possible sale of Asda. Morrisons has sold five stores since its takeover, with its new owners looking to recoup some capital following the acquisition, and remains in a strong position to raise further funds given that it owns approximately 85 per cent of its portfolio.

Interestingly, the sale and leaseback trend has seen some reversal over the last 15 years. Tesco and Sainsbury’s, which accounted for majority of sale and leaseback activity between 2010 and 2014, now both have strong financial positions, allowing them to acquire assets and lower their rental overheads. Supermarket REIT’s reversionary sale of 21 stores to Sainsbury’s in March somewhat epitomises this trend, but we also saw Tesco acquire two of its stores last year.

However, we are, of course, facing ongoing economic uncertainty, so was this resurgence shortlived and what is the expectation for volumes for the rest of the year?

There’s no doubt that despite the blistering start to 2023, Q2 investment volumes have retracted somewhat, totaling £233 million, 48.4 per cent below the 10 year average. Risk yields in this sub-sector have closely mirrored and reacted to the increasing cost of money and softening UK Bond yields, however, these look to have stabilised for now following the positive news and inflation slow down in July, which should see confidence return to the market.

Why? Supermarket investment remains a comparatively secure investment option for long-term income, which is particularly pertinent in the face of a downturn. While further interest rate rises may hamper the buyer pool in the short-term, it’s unlikely to impact the price of good performing stores in well-positioned locations. Property investment companies are likely to continue dominating the buyer market, with sale and leaseback deals set to generate capital for new owners in the sector.

Larger omnichannel stores continue to be the preferred choice for investors, offering online fulfilment opportunities. However, the growth of stock in smaller units (led by the discounters as well the high street rollouts by the likes of Asda, Amazon and M&S) could bring more units of this size to the market over the next few years, offering investors a differentiated opportunity.

Furthermore, food and grocery by their very nature are essential consumer purchases. As a result many operators have shown a great deal of resilience, continuing to outperform in challenging economic times as they compete to offer the best value to their customers. This continued success underlines the sub-sector’s strength and is a strong contributing factor to investor interest.

Further information

Contact Sam Arrowsmith

Spotlight: UK Grocery Report – 2023