UK supermarket investment remains elevated, with year-end 2021 volumes reaching £1.57 billion. While this is -5.9% short of the heightened volumes experienced in 2020, it does still represent an 8.3% increase compared to the ten-year annual average. Deal count totalled 67 in 2021, up 31.4% on the ten-year average while overtaking the previous peak levels of 64 deals reported in 2020.

The availability of long-term RPI-linked leases across the supermarket sector continues to attract investors seeking long-term income security. Grocery investment therefore appears particularly attractive compared to other asset classes, including traditional retail whereby lease lengths are continuing to contract heavily.

While 20+ year inflation-linked leases continue to prove resilient, we are also witnessing an increasing number of deals with shorter lease terms. For deals with lease length data available, those with an unexpired lease term of under 20 years accounted for a 69.8% share of deals in 2021, up from 60.5% in 2020. Meanwhile, more deals are completing with an open market rent review leasing structure, demonstrating that even assets that have been historically less attractive to investors are driving strong investment volumes.

Strong fundamentals maintain heightened demand from institutional investors

Investor demand for secure long-income assets continued driving volumes in 2021, with institutions and REITs maintaining their market dominance. Supermarket Income REIT’s supermarket sweep has continued, single-handedly accountable for over 41.9% of UK investment volumes in 2021, with two further acquisitions completing in 2022 already. US-buyer, Realty Income Corporation, continued their hunt for UK assets, completing eight deals worth over £287 million.

Investors continue targeting larger, omnichannel stores, particularly those with strong online fulfilment capabilities. As a result, average store size has increased to over 52,500 sq ft, up 17.9% compared to 2020 levels.

As noted in last year’s report, investor demand from occupiers remains strong, as some supermarket chains continue to increase their freehold portfolio. Once again Tesco has been most acquisitive in this field, transacting on two key superstores in York and Bury, totalling almost £100 million. Aldi and Lidl have also been acquisitive, albeit namely site sales for future foodstore development in a bid to continue their substantial national portfolio growth.

Investor demand continues applying downward pressure on prime supermarket yields

Supermarket yields averaged 4.93% in 2021, sharpening by 54 bps compared to the 2020 average, equating to the keenest average yields reported since 2014. Savills prime equivalent yields remain 50 bps keener than 2019 levels, at 4.25%.

Despite recent yield hardening, the spread between prime supermarket yields and ten-year government bonds has widened substantially since 2017. The yield spread as of Q4 2021 reached 330 bps, considerably higher than the long-term (ten-year) average of 283 bps. This has greatly increased the appeal of grocery investment as an alternative to traditional index-linked investments.

Looking ahead, the defensive characteristics displayed by supermarkets through the pandemic coupled with ongoing demand for long-term secure income bodes well for the grocery market. It’s safe to presume strong investor demand for supermarkets will continue into 2022, along with a broader pool of potential buyers seeking to enter the market, which might apply further downward pressure on prime yields.

_{Read the articles within Spotlight: UK Grocery Report below.}