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Grocery retailers give investors food for thought

Much of the retail sector has been ravaged by the Covid-19 pandemic. But as purveyors of ‘essential’ goods, grocery retailers are finding favour with investors. Paul Strohm reports.

The recent discovery of a Covid-19 vaccine has brought the prospect of an end to the disruption that the pandemic has wrought around the world and, maybe in the not too distant future, the return to a more normal pattern of life. 

But in real estate’s case, particularly retail real estate, the genie is out of the bottle. The pandemic has accelerated trends that were already in progress. At the heart of these trends was the fact that some of the goods and services, normally provided in physical units in high streets and shopping centres, could be sold online. 

Consequently, not all retail property has suffered equally during the pandemic. A common key distinction has been between ‘essential’ and ‘non-essential goods’ as restrictions on both consumers and retailers have come into force during periods of lockdown.

‘Essential’ has generally meant food and pharmacy products; ‘non-essential’ is pretty much everything else. This has made survival more straightforward for grocery-based retailers, in part because selling groceries online to everyone, even using click-and-collect, requires vast logistics capacity and is impractical. During the first lockdown in the UK, people waited weeks for a delivery or click-and-collect slot.

So, grocery retailers’ main preoccupation has been maintaining their supply chain and making their shops and procedures ‘Covid-safe’. 

But for those retailers selling non-essentials, survival, at least during periods of tougher lockdowns, has been predicated on the ability to switch to an online sales model. For retailers with established omnichannel services and well developed online sales arms, it was a case of adjustment, a change of emphasis. 

ECE has found success with its Digital Mall concept

These patterns have been reflected in the shifts in investors’ attitudes to different types and levels of retail property.  “Two quarters on from the start of the Covid-19 pandemic in Europe and a clear hierarchy of investor demand has emerged,” says Tom Leahy, senior director EMEA analytics, at research firm RCA. “Industrial, especially logistics assets, apartments, and grocery stores, sit at the top of the table. At the bottom are hotels and large swathes of the retail sector.”

CBRE Germany co-head of retail investment Jan Schönherr sums it up by saying: “The real estate adage of ‘location, location, location’ has been replaced by ‘food, food, food’. The tenants of food-anchored properties did not suffer any loss of revenue due to closures, and uncertainty about their future is not as great as it is with other sectors.”

“The focus will remain on properties with a high food and drug store content, with DIY centres as a source of a reliable cash flow also becoming increasingly important,” Schönherr adds. 


Investors’ lap of luxury 

One anomalous investment type – arguably the ultimate “non-essential” category – is luxury goods. Sales might be lagging while consumers are confined to their homes, but Investors believe demand for luxury retail will persist. 

Invesco Real Estate recently bought two adjacent and connected buildings at 6-12 Rue du Faubourg Saint Honoré, in Paris’s 8th arrondissement, an area known for its high-end retail and global fashion houses.

“The Paris market continues to play a big role in our European investment strategy and we are confident that, due to a global attractiveness on a long-term view, the high-end luxury retail sector will prove highly resilient,” says Invesco senior director, fund management, William Ertz.


Barings Real Estate is an investor that is confident about the outlook for essentials- and food-anchored retail assets, as its head of real estate transactions Europe, Gunther Deutsch, explains: “E-commerce penetration in the supermarket sector is still at low levels, largely due to the cost implications for cheap delivery, and we believe spending in this category could increase in the near term due to the impact of Covid-19.”

Supermarket sweep

Barings bought a newly built retail park in Bad Kreuznach, near Frankfurt, in September for €13 million on behalf of a separate account mandate for SIS. The 3,900 sq m property is let on long leases to supermarket chain REWE, Germany’s second largest retailer, and pharmacy Drogerie Markt. 

Investor Benson Elliot, meanwhile, says it continues to see long-term value in market-dominant, needs-driven retail formats. “While the structural trends underpinning the retail sector have no doubt accelerated over the past few months as a result of the enforced lockdown, the benefits of grocery-anchored centres, which remained open because of the community services they provide, were also accentuated,” says senior partner Joseph De Leo.

Benson Elliot paid €65.5 million to RDI REIT for the 18,600 sq m Schloss-Strassen Center in Steglitz-Zehlendorf in south-west Berlin. Tenants here also include REWE and Drogerie Markt. The acquisition increased the value of the firm’s German convenience retail holdings to around €250 million.

REWE has a long lease at a retail park in Bad Kreuznach recently bought by Barings Real Estate

Eroski, one of Spain’s largest supermarket chains with more than 1,600 stores, has taken advantage of investor demand for food-anchored assets with sale-and-leaseback deals. While retail property fund manager Pradera paid €130 million for a portfolio of six Eroski hypermarket assets in Spain’s Basque Country and Navarra region on behalf of German pension fund Nordrheinische Ärzteversorgung (NAEV), WP Carey paid Eroski €87 million for a portfolio of 27 supermarkets in northern Spain and the Balearic Islands.

Pradera fund manager Peter Davies explains: “The projected extremely long income stream secured against the covenant of the dominant grocery operator in this region of Spain was, from the outset, one of the most attractive reasons for acquiring this portfolio.”

The pain for investors will be less for those picking new stock against those who have historically placed their faith in retail, particularly shopping centres. While liquidating assets is unlikely to be a viable option while demand is thin and large value concessions would be necessary, adapting assets could be a solution. While some department stores such as John Lewis in the UK have looked at converting upper floors to offices for commercial letting, shopping centre owners are considering a range of options for transforming pure shopping centres to mixed-use.

‘E-commerce penetration in the supermarket sector is still at low levels, and we believe spending in this category could increase in the near term due to the impact of Covid-19.’

Gunther Deutsch, Barings Real Estate

However, Hamburg-based property company ECE had some time ago anticipated the pressure from online retail and sought to embrace technology with its Digital Mall, which started out as an enhanced online shopping centre directory, but is evolving into an omnichannel platform for tenants and shoppers in its centres.

ECE recently formed a partnership with Google to enable bricks-and-mortar retailers to display products in Google search results in response to local searches. ECE says the ability for consumers to determine whether a product they want is available in-store and to view a complete range with information about pricing and availability is valuable. Enquiries about local availability have risen by a factor of seven in the last year and, globally, 68% of physical purchases are preceded by an online check.

ECE has also experimented with online sales of goods direct from local stores. Using the Limango platform of related retail company Otto Group, and with retailer Jack Wolfskin, the initiative increased Jack Wolfskin’s average daily revenue at Alstertal-Einkaufszentrum Hamburg by 500%. For this trial, Hermes Germany handled logistics and set up a pop-up parcel shop within the centre.

Logistics resilience

So the last-mile logistics sector is not necessarily conventional retail’s enemy, although it is nipping at its heels and has perceived that physical retail’s redundancy may be its source of new business. “There is a lot of capital looking to get into what is one of the more resilient asset classes, logistics,” says P3 Logistic Parks’ chief investment officer Otis Spencer. “Retail is going through a bit of a transition, there’s a big push towards e-commerce and with the consumer attitude to shopping experience we think that is going to create an opportunity for repurposing retail assets.”

Benson Elliot paid €65.6m for the Schloss-Strassen Center in Berlin.

Opportunities are specific to different geographies, Spencer says. Europe does not tend to have the same out-of-town shopping centre culture as the US, so converting “zombie malls” that have lost their anchor tenant is less of an option. P3 sees more scope in hypermarkets, which tend to be 10,000 to 15,000 sq m on a site twice that size and are in ideal locations to serve online purchasers. “These assets may have functioned well in the past and with modest repurposing can convert to a true logistics asset.”

Spencer adds that as e-commerce’s share of sales has accelerated due to the pandemic lot of retailers are changing format to click-and-collect and other ways of generating their business through online services. “We want to grow with those retailers,” he says.

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