Supermarket sector proves resilient amid market crisis, says Savills

Growing competition amongst UK supermarkets looking to expand their market share is set to create opportunities for investors and developers, according to Savills' latest food sector report. The report states that the top four grocery retailers in the country have continued to complete sale-and-leaseback deals and Sainsbury's has also entered into joint venture agreements with developers to expand its portfolio, thus creating opportunities for developers to unlock the potential of existing sites. Some supermarkets have also released value from their freehold estate by entering into sale and leasebacks with institutional investors.

'Recent changes in approach have resulted in operators becoming increasingly receptive to leasing. Their historic preference for the greater control over operational formats that freeholds offered often meant that new store development was largely close to developers and investors,' said Tim Doughty, director at Savills.

The ability of the supermarket sector to withstand generally poorer trading conditions has also proved attractive to investors. Mark Garmon Jones, director at Savills, said: 'Even compared to other specific retail sectors, supermarkets would appear to have been hit less hard than say retail warehousing. We believe that this resilience is based on the operational strength of the grocery sector maintaining covenant strength. A number of investors have entered the sector owing to the improved rental growth prospects. In addition, rents still appear affordable and letting demand is holding up well from the main players to the ever expanding value operators.'

In terms of location, the research indicates that over the last three decades, the four large supermarket operators have preferred substantial out/edge of town locations as they offer significant economies of scale, bolstering buying power with suppliers. However, the UK government's introduction of a new planning policy for town centres has increased the difficulty of obtaining planning permission for large out-of-centre stores. As a result supermarkets have had to return to more central locations in order to expand their offering and enhance market share, inevitably leading to operators launching smaller formats.