The Sainsbury effect
The takeover battle concerning UK retailer J Sainsbury is turning property investors’ eyes to Europe. Sainsbury’s portfolio could provide sale-and-leaseback and REIT opportunities. However, the assets of some European food operators are also attracting attention.
Elsevier Food International, Vol. 10, Number 2, May 2007
Russell Handy
The battle to take over J Sainsbury could result in the UK supermarket chain being split in two. Private equity firms have been preying on the supermarket chain, keen to separate property from the retail operations due to the attraction of a £7 billion (€10.5 billion) property portfolio – which includes the freehold on 260 of its 750 stores. If an £11 billion deal does go ahead, it would be the biggest-ever retail buyout in Europe.
Elsevier Food International, Vol. 10, Number 2, May 2007
Russell Handy
The battle to take over J Sainsbury could result in the UK supermarket chain being split in two. Private equity firms have been preying on the supermarket chain, keen to separate property from the retail operations due to the attraction of a £7 billion (€10.5 billion) property portfolio – which includes the freehold on 260 of its 750 stores. If an £11 billion deal does go ahead, it would be the biggest-ever retail buyout in Europe.
With office investment opportunities in short supply, retail property has been in increasingly high demand. Retail share prices have risen because many retailers still own their assets. Food retailers are especially sought after because their business is relatively immune to economic swings. Private equity firms step in when they believe that the assets and the operations together are worth more than the value of the company.
Using high leverage, these firms have the capital to buy whole operations and split out the property assets. Private equity firm Kohlberg Kravis Roberts, which has bid for J Sainsbury alongside Blackstone and CVC Capital Partners, made headlines when it took over ailing Dutch retailer Vendex KBB in 2004 for €1.4 billion. But the surprise was even greater when a year later it sold the property portfolio for roughly the same sum.
J Sainsbury, meanwhile, is believed to have already looked at selling and leasing back its assets in a bid to stop a takeover. Household names such as J Sainsbury are keen to get property off the balance sheet – the sale of their freeholds releases capital for debt-clearing or further expansion, at home or abroad.
Other factors involved in the takeover are the UK’s high interest rates, which could put investors off, and the country’s recently-adopted real estate investment trusts (REITs), which could allow J Sainsbury or a new owner to take advantage of the vehicle’s tax status.
Appetite for sale-and-leaseback
Supermarket property clearly has the potential to interest both private and corporate investors. And the simple fact that people will always need feeding could be enough to keep retail investment in the spotlight this year.
Although the recent arrival of REITs could provide a strategy for a disposal programme, J Sainsbury may find selling its own assets a long and difficult process. In March 2005, Tesco completed the first of two UK deals, selling 12 stores and two distribution centres for £366 million to property investor Vincent Tchenguiz’s Consensus Business Group, with a buyback option after ten years. In November of the same year, Tesco sold two retail warehouse parks and two stores to Morley Fund Management for £270 million. Coincidently, Tchenguiz’s brother, Robert, recently took a three per cent stake in J Sainsbury.
Last March Tesco announced a £650 million property joint venture with British Land, an existing partner in a number of other property transactions. The deal – which involves 21 stores that account for 3 per cent of Tesco’s retail property in the UK – will generate Tesco net proceeds of £570 million, with recognised property profits of £142 million. “The 50/50 joint venture enables Tesco to release funding for its future growth, whilst maintaining the flexibility to operate and adapt its property assets”, Tesco said in a statement.
This partnership is the second phase of the property sale and leaseback programme announced in April 2006, and follows a transaction with British Airways Pension Fund, announced in January 2007, which raised proceeds of £445 million. But Tesco’s huge property portfolio is under investigation as part of a Competition Commission inquiry into the chain’s dominance of the UK retail sector.
For all the talk about J Sainsbury, investors wanting retail property should turn their eyes to continental Europe. “Although there’s been no real explosion of retail sale-and-leasebacks, I think we’re likely to see more in continental Europe than in the UK this year,” says John Taylor, a real estate director with KPMG. “I think there will be more movement in France, Germany, Italy and Russia.”
John Welham, senior director, European retail investment, at CB Richard Ellis, agrees, saying: “Sale-and-leaseback deals have been talked about for some time and it seems there’s a lot of appetite for them in retail. We’ve seen some quite steamy prices in the sector.” Tesco, for example, has nearly 300 stores and 55,000 staff across Europe – in Ireland, Hungary, Poland, the Czech Republic, Slovakia and Turkey, through the Kipa chain. But Tesco has so far made little progress in selling its European assets, despite a pledge to offload £5 billion of property over the next five years and expand its market share in Eastern Europe.
Using high leverage, these firms have the capital to buy whole operations and split out the property assets. Private equity firm Kohlberg Kravis Roberts, which has bid for J Sainsbury alongside Blackstone and CVC Capital Partners, made headlines when it took over ailing Dutch retailer Vendex KBB in 2004 for €1.4 billion. But the surprise was even greater when a year later it sold the property portfolio for roughly the same sum.
J Sainsbury, meanwhile, is believed to have already looked at selling and leasing back its assets in a bid to stop a takeover. Household names such as J Sainsbury are keen to get property off the balance sheet – the sale of their freeholds releases capital for debt-clearing or further expansion, at home or abroad.
Other factors involved in the takeover are the UK’s high interest rates, which could put investors off, and the country’s recently-adopted real estate investment trusts (REITs), which could allow J Sainsbury or a new owner to take advantage of the vehicle’s tax status.
Appetite for sale-and-leaseback
Supermarket property clearly has the potential to interest both private and corporate investors. And the simple fact that people will always need feeding could be enough to keep retail investment in the spotlight this year.
Although the recent arrival of REITs could provide a strategy for a disposal programme, J Sainsbury may find selling its own assets a long and difficult process. In March 2005, Tesco completed the first of two UK deals, selling 12 stores and two distribution centres for £366 million to property investor Vincent Tchenguiz’s Consensus Business Group, with a buyback option after ten years. In November of the same year, Tesco sold two retail warehouse parks and two stores to Morley Fund Management for £270 million. Coincidently, Tchenguiz’s brother, Robert, recently took a three per cent stake in J Sainsbury.
Last March Tesco announced a £650 million property joint venture with British Land, an existing partner in a number of other property transactions. The deal – which involves 21 stores that account for 3 per cent of Tesco’s retail property in the UK – will generate Tesco net proceeds of £570 million, with recognised property profits of £142 million. “The 50/50 joint venture enables Tesco to release funding for its future growth, whilst maintaining the flexibility to operate and adapt its property assets”, Tesco said in a statement.
This partnership is the second phase of the property sale and leaseback programme announced in April 2006, and follows a transaction with British Airways Pension Fund, announced in January 2007, which raised proceeds of £445 million. But Tesco’s huge property portfolio is under investigation as part of a Competition Commission inquiry into the chain’s dominance of the UK retail sector.
For all the talk about J Sainsbury, investors wanting retail property should turn their eyes to continental Europe. “Although there’s been no real explosion of retail sale-and-leasebacks, I think we’re likely to see more in continental Europe than in the UK this year,” says John Taylor, a real estate director with KPMG. “I think there will be more movement in France, Germany, Italy and Russia.” John Welham, senior director, European retail investment, at CB Richard Ellis, agrees, saying: “Sale-and-leaseback deals have been talked about for some time and it seems there’s a lot of appetite for them in retail. We’ve seen some quite steamy prices in the sector.” Tesco, for example, has nearly 300 stores and 55,000 staff across Europe – in Ireland, Hungary, Poland, the Czech Republic, Slovakia and Turkey, through the Kipa chain. But Tesco has so far made little progress in selling its European assets, despite a pledge to offload £5 billion of property over the next five years and expand its market share in Eastern Europe.
“Although there’s been no real explosion of retail sale and leasebacks, I think we’re likely to see more in continental Europe than in the UK this year.”
John Taylor, KPMG
Property activities in continental Europe
Continental Europe has not seen very much sale-and-leaseback activity, with the food sector particularly keen on holding on to its property. But dual ownership – in which a mall is sold while the owner of the retail food operation retains its freehold – has become increasingly popular.
There have, of course, been a few sale-and-leaseback deals on the Continent. In 2005, Co-op sold a Swedish portfolio to ING Real Estate for SKr4.2 billion (€446 million), reflecting a net initial yield of 5.5 per cent, a record low yield for out-of-town retail sites. What’s more, Co-op was struggling – the reason behind the sale in the first place. Who would honour the lease contracts should Co-op Sweden go bust?
Money, or a lack of it, was also the reason for French retailer Casino to sell its Polish assets and exit the market. Its Géant hypermarkets simply did not catch on with the Poles. They were clearly too big. GE Real Estate bought the 18 Géant stores and got German retailer Metro Group to run them. In a separate deal, Casino sold a portfolio of Polish Leader Price stores to Tesco for £72 million (€105.4 million). German company Kaufland has had more success with ‘compact’ stores less than half the size of Casino’s Géant hypermarkets. Casino hopes to complete its Polish asset disposal programme by the end of this year.
Expansion is another factor prompting supermarkets to free up capital – by selling their assets and leasing them back. French retailer Carrefour has had a successful sale-and-leaseback experience in Poland. In 2003, it raised more than €580 million from selling and leasing back its stores. Last year, Carrefour spent €148 million on 24 new stores, hoping to spend a similar amount this year and open a further 20 new stores.
Tesco – which first entered the Polish market in 1995 – and Polish discount chain Biedronka (owned by Portuguese retailer Jerónimo Martins) are tipped for further expansion in Poland this year. But Tesco may have to deal with the Polish government, which has doubts about foreign retail investment and is tightening the belt on Sunday trading.
In neighbouring Czech Republic, retailers have also battled for market share. German company Schwarz, owner of Lidl and Kaufland, dominates the Czech market, followed by Dutch Ahold and Tesco, which took 11 of Carrefour’s Czech hypermarkets for €189 million in 2005 (see table).
Retail is a fickle world
Not only does a store’s profitability in Europe depend on its size, but increasingly on product: discount chains are expected to grab a bigger slice of the market. Chains such as ALDI and Lidl are tipped to continue their growth and take more market share in Slovenia, Romania and Latvia.
Property investors should look beyond the length of the lease and ask themselves what they can do with the property if it becomes vacant. Retail is clearly a fickle world and business strategies soon become obsolete. In the UK, stores have become bigger and bigger as they have started to sell more non-food items, such as clothes and electronic products.
The pure grocery nature of Sainsbury property may put off potential buyers who see little flexibility in the chain’s assets; it is difficult to find alternative tenants for supermarket warehouses and stores because of their size and location. Hence, a successful sale-and-leaseback can be compared to a bond investment.
“There’s a lot of appetite and demand for long leases in retail, and provided you get the right yields, it can be nearly as good as buying a bond,” says CBRE’s Welham.
Property activities in continental Europe
Continental Europe has not seen very much sale-and-leaseback activity, with the food sector particularly keen on holding on to its property. But dual ownership – in which a mall is sold while the owner of the retail food operation retains its freehold – has become increasingly popular.
There have, of course, been a few sale-and-leaseback deals on the Continent. In 2005, Co-op sold a Swedish portfolio to ING Real Estate for SKr4.2 billion (€446 million), reflecting a net initial yield of 5.5 per cent, a record low yield for out-of-town retail sites. What’s more, Co-op was struggling – the reason behind the sale in the first place. Who would honour the lease contracts should Co-op Sweden go bust?
Money, or a lack of it, was also the reason for French retailer Casino to sell its Polish assets and exit the market. Its Géant hypermarkets simply did not catch on with the Poles. They were clearly too big. GE Real Estate bought the 18 Géant stores and got German retailer Metro Group to run them. In a separate deal, Casino sold a portfolio of Polish Leader Price stores to Tesco for £72 million (€105.4 million). German company Kaufland has had more success with ‘compact’ stores less than half the size of Casino’s Géant hypermarkets. Casino hopes to complete its Polish asset disposal programme by the end of this year.
Expansion is another factor prompting supermarkets to free up capital – by selling their assets and leasing them back. French retailer Carrefour has had a successful sale-and-leaseback experience in Poland. In 2003, it raised more than €580 million from selling and leasing back its stores. Last year, Carrefour spent €148 million on 24 new stores, hoping to spend a similar amount this year and open a further 20 new stores.
Tesco – which first entered the Polish market in 1995 – and Polish discount chain Biedronka (owned by Portuguese retailer Jerónimo Martins) are tipped for further expansion in Poland this year. But Tesco may have to deal with the Polish government, which has doubts about foreign retail investment and is tightening the belt on Sunday trading.
In neighbouring Czech Republic, retailers have also battled for market share. German company Schwarz, owner of Lidl and Kaufland, dominates the Czech market, followed by Dutch Ahold and Tesco, which took 11 of Carrefour’s Czech hypermarkets for €189 million in 2005 (see table).
Retail is a fickle world
Not only does a store’s profitability in Europe depend on its size, but increasingly on product: discount chains are expected to grab a bigger slice of the market. Chains such as ALDI and Lidl are tipped to continue their growth and take more market share in Slovenia, Romania and Latvia.
Property investors should look beyond the length of the lease and ask themselves what they can do with the property if it becomes vacant. Retail is clearly a fickle world and business strategies soon become obsolete. In the UK, stores have become bigger and bigger as they have started to sell more non-food items, such as clothes and electronic products.
The pure grocery nature of Sainsbury property may put off potential buyers who see little flexibility in the chain’s assets; it is difficult to find alternative tenants for supermarket warehouses and stores because of their size and location. Hence, a successful sale-and-leaseback can be compared to a bond investment.
“There’s a lot of appetite and demand for long leases in retail, and provided you get the right yields, it can be nearly as good as buying a bond,” says CBRE’s Welham.
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