Store market

Built to last – investments in the grocery store market

It’s been a tough race for the global retail industry, thanks to COVID-19. In recent times, calls for “an end to brick and mortar retailing” have undoubtedly grown louder; but in reality, over the past two decades, this theme has repeatedly proven to be flawed.

It is difficult to identify a single major factor in this market distress; As for sure, this was not driven exclusively by the rise of COVID-19.

This, however, has created a new wave of opportunities manifested in countercyclical investments in the sector; in particular, among retailers whose locations dominate their catchment areas, which continue to reinvent themselves and where assets can be reused. This created a polarized industry with clear winners and losers within a very short timeframe.

Food stores, on the whole, have become winners both during and after the lockdown. The emphasis on online sales channels was born out of necessity and is now an integral part of their operations, but the in-store selection model as a whole cannot be ruled out.

This omnichannel sales model is a very important development in the grocery store industry because it allows the operator – the retailer – to be truly channel agnostic.

The future food store strategy can therefore be customer-centric, regardless of the point of sale – in-store, online with delivery or click and collect.

As a result, well-located and highly-specified supermarkets have reinvented themselves as winners in last mile logistics, as their location next to large residential watersheds allows them to benefit from their ability to deliver in shorter time frames.

The countercyclical nature of grocery store assets has attracted a significant inflow of capital from institutional and private allocators in the UK and MENA region.

Basically, these investors believe that the demand factors remain intact, regardless of the business cycle. In times of growth, increasing levels of disposable income provide consumers with more options to purchase food products, while in times of uncertainty, consumers typically limit their spending on Veblen products in order to procure their goods and services. basic.

The COVID-19 pandemic is a unique exception to this pattern, as grocers have been able to continue operating while containment measures, implemented across much of Europe, have significantly affected the buying behavior of consumers. consumers in other sectors of the retail market. High levels of homework have further boosted demand for groceries.

Transactional evidence over the past 12 months reveals a staggering cap rate compression of around 80 basis points, with well-located assets with long institutional leases tied to RPI (inflation) trading at the initial cap rate of 4%.

This appetite also spills over into debt capital markets, as lenders competitively value senior debt at an aggregate rate of around 2% for this product, implying their belief in this sub. – asset class. We are likely to see transaction volumes in this sub-sector exceed £ 1bn for 2021.

MENA institutional and private investors will continue to monitor the market for this product, as their demand for yield and inflation-hedged investments grows.

© Avis 2021

All opinions expressed in this article are those of the author.

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