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Research: The food and groceries sector is becoming the new core in retail investment

The resilience of the groceries sector and the stability of income is attracting rising investor interest.

Property investors show confidence in the physical foodstores While investors are becoming more cautious about retail, the ongoing resilience of the food sector has provided a secure investment alternative. Last year, investment volumes in supermarkets, hypermarkets and discount stores were remarkably strong, considering the disruption to the wider commercial real estate market caused by the pandemic. Investor shift in this market segment was already noticeable for a number of years now. Since 2017, transaction activity has been steadily rising by 46% pa on average. In 2020, investment in the food and groceries sectors of the 16 markets that we monitor was close to €6.5bn, 102% up YoY and 169% above the five-year average. This corresponded to 224 deals, which was 21% below the five-year average. Evidently, the activity was driven by larger portfolio transactions (50 deals). The average deal size was €28.9m compared to an average of €8.6m over the past five years. Germany was the largest market at €3.1bn, followed by the UK at €1.7bn and Spain at €675m. The markets that experienced the sharpest rise compared to their five-year average were Germany (217%), and Spain (145%).

According to RCA, up to the end of March, the total volume of grocery-anchored retail transactions (completed and pending) was close to €1.33bn across 346 properties, which is equivalent to 28% of the total retail investment turnover since the beginning of the year. Renewed lockdown restrictions across Europe have limited investor mobility and thus market activity, which is more than 50% down compared to Q1 2020. Spain, the UK and Germany have driven the activity since the beginning of the year. The share of investment in foodstores reached a historic high Last year, investments in supermarkets, hypermarkets and food discount stores accounted for the first time on record for 21% of the total retail activity, up from a five-year average of 7%. Although parts of the retail property market are losing their core status in the eyes of many investors, conversely, the strength of the food sector attracts an increasing number of buyers. The food sector has proven its defensive characteristics during the pandemic, capturing a higher share of consumer spending, as non-essential shops, cafés and restaurants have remained closed in most countries for prolonged periods of time. While we could assume that the reopening of the hospitality industry might mean that this growth could partly reverse, we expect that some of the new consumer habits will remain. The operational resilience of the sector, even during times of uncertainty, has largely eliminated the risk of deferred/unpaid rent payments, offering security to investors.

Historic UK rental growth data highlights how the decline in rental value growth for supermarkets has been much less severe than for other areas of the retail market during periods of economic downturn. During the recent cycle, which is also driven by structural change, MSCI reports average YoY rental value growth of -1.6% for foodstores in 2019, whereas it stood at -4.0% for the rest of retail. 2020 repeated this pattern, but the margin had grown, recording a -1.8% YoY rental decline for grocery stores, much more in line with ‘all property’ types, and significantly less than -7.0% for all of retail. Similar trends have been recorded in other European markets too.

Furthermore, grocery real estate leases typically offer annual indexation and longer terms, often without break clauses, while major grocery chains generally provide strong covenants. This makes grocery real estate attractive to investors looking for longer and more secure income streams. A stable to moderate rental growth outlook, in comparison with other retail asset classes, provides security in a more volatile retail market. Sales and leasebacks drive activity, but supply still does not meet investor demand The market continues to be dominated by established retail sector specialists, however, diversification away from commercial market segments with increased occupier risk creates more competition. Moreover, the rising allocations in real estate by institutional investors, who look for long-term income streams to match their liabilities, creates further investment pressure in crisis-proof sectors that offer stable cash flows, such as supermarkets and discount stores.

It may prove challenging for supply to meet demand during the course of this year. Some product could come on to the market in the form of sale and leaseback opportunities, which allow food retailers to raise capital to reinvest in order to meet the demands of a changing consumer environment, often to scale their online and click & collect business. These investments are decisive from a real estate perspective too, as they determine the underlying covenant strength of the tenant. Last year saw a number of such transactions, such as Mercadona and Eroski in Spain, Waitrose in the UK, Jumbo in the Netherlands, Netto/Coop in Sweden, Esselunga in Italy, and others.

Investor demand for food markets is expected to continue to rise. In view of the further intensifying bidding war, some established players are also increasingly taking new approaches and securing their acquisition pipeline early on via framework agreements with project developers.

Prime yields in the food sector are compressing in markets with strong activity Transaction evidence from last year shows that the average achieved initial yield across the markets we monitor was at 5.9%, 80 bps below 2019 level, in contrast to the wider retail market, which has been experiencing outward yield movements. The average prime achievable retail yield has moved out from 4.43% in 2019 to 4.75% at the end of 2020, while the average prime achievable yield for supermarkets moved in from 5.7% to 5.53% over the course of 2020. Last year, yields compressed in Spain -100bps, Poland -100bps, Germany -40 bps, UK -25 bps, Czech Republic -25 bps, while the rest have not experienced significant yield movements yet. In the first quarter of 2021, strong investor interest in the supermarket sector of Germany, France, Italy and the Netherlands has led to further hardening of prime yields (-50 to -60 bps). In the remaining markets, prime achievable yields remained stable, mainly due to lack of transaction activity, while some experienced some yield softening in line with the overall retail trend (Norway, Hungary).

The lowest yields can be found in France (3.5% for urban store), Germany (3.9%), Spain (4.5%) and the UK (4.5%). Yields are still at 6% or higher in CEE markets. We expect the operational strength of the sector and the quality of income streams to result in sustained investor appetite and to continue to put downward pressure on yields.


  • As the vaccination programme continues across Europe and lockdowns begin to ease, consumer spend is expected to increase slightly, driven by record-high savings and pent-up demand.

  • Despite the sharp decline of retail sales growth across Europe in 2020 (from 3.9% in 2019 to 1.7% in 2020), food and grocery sales increased by 7.5%. Forecasts indicate that growth will normalise over the next five years to 2.2% pa, compared to an overall average of 2.7% pa (Forrester, Western Europe).

  • The online growth rate of the grocery sector went up from 19.5% in 2019 to 56.1% in 2020. The online share of Food & Beverage jumped from 3.4% to 5.3% on average across Western Europe and is projected to reach 12.6% by 2025 (Forrester).

  • The immediate post-GFC period showed that if consumers swing into belt-tightening mode, then it is the value end of the spectrum that benefits most. This suggests that post-pandemic, the strong growth in demand from the value retailers will very likely be sustained.

  • Unlike much of the rest of retail, online grocery orders are typically serviced by the stores themselves, making the true value of the store much greater than is initially obvious. During the pandemic, large food retailers were only able to meet the surge in online demand because of their network or stores.

  • Established pure players have grown and new e-grocers models have emerged during the pandemic, differentiating themselves by the types of products and services they offer and their method of fulfilment and delivery or order. Although they do not require physical stores, these companies depend on near-instant delivery – and rely on urban warehouses to compete.

  • Traditional grocery retailers are solving the last-mile delivery challenge through micro-fulfilment centres and dark supermarkets, which are mini-logistics hubs located in high-density urban centres.

  • As shopping migrates online, physical stores will need to focus on the in-store experience, quality of service, convenience and trust. Location and broad store network will continue to matter. Innovation in design and fit-out, lighting and communal spaces will be required to accommodate the new trends that focus on customer experience.

  • The food sector is becoming the new core in retail property investment. Last year, investments in supermarkets, hypermarkets and food discount stores accounted for the first time on record for 21% of the total retail activity, up from a five-year average of 7%.

  • The defensive characteristics and the operational resilience of the sector will continue to attract an increasing number of buyers. Some product may come on the market through sales and leasebacks, but overall supply may not meet the level of demand.

  • Competition has led to yield compression, with the prime average supermarket yield in Europe moving in from 5.7% to below 5.5% by Q1 2021. In view of the further intensifying bidding war, we expect prime yields to move in further.

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