In 2017, London assets were in demand due to the weak Sterling, giving rise to landmark deals such as the sale of the ‘Walkie-Talkie’ building for £1.3bn and the ‘Cheesegrater’ building at £1.1bn. The surge in foreign investment into conventional commercial assets put pressure on yields, causing buyers to turn to other asset classes in search of returns.

In particular, 2017 saw more investors acquiring foodstores. According to Colliers, investments in UK supermarkets rose 20% in the first half of 2017 at an average net yield of 5.05%. In Nov/Dec ‘17, the average prime yields were 4.50%, based on research by Savills.

Foodstores have attracted both local and foreign investors as they offer higher yields as compared to government bonds. In addition, the UK food and grocery market is set to grow by 15% by 2022. Key players have been expanding their operations, with Lidl planning to set up its biggest UK distribution centre and Tesco acquiring Booker for £3.7bn. As such, the sector will likely continue to enjoy healthy growth, which would ultimately benefit landlords as well.

Potential residential development

Aside from stabilised income to excellent covenants, some of these sites come with residential development potential. Given the shortage of homes in the UK, demand for new homes, particularly within the affordable range, will remain high. With foodstore sites, developers can build additional units above or around the existing retail store. According to property analyst GL Hearn, approximately 150,000 additional homes can be built above or next to existing stores. This represents a significant amount of untapped space for developers.

By building homes next to or above foodstores, residents will enjoy the convenience of a supermarket at their doorstep, while tenants benefit from a larger catchment of consumers. Developers also benefit from the premium commanded by having a supermarket close by. Known as the ‘Waitrose Effect’ Lloyds Bank found that homes located close to a Waitrose, Marks & Spencer or Sainsbury’s are more likely to fetch higher prices.

Even supermarkets themselves have adopted this strategy, moving into residential development. Tesco has already completed two projects, while Sainsbury’s recorded a £95m profit in their collaboration with Barratt homes on the redevelopment of its Nine Elms site.

Looking ahead, we believe supermarket assets will continue to be a compelling investment in the UK. However, with more investors looking into this space, selection of suitable investment sites will be crucial.