Tesco Accelerates Sale Leaseback Program to Meet Market Demand

Property Week - November 13, 2009

Tesco has begun the next phase of its £5bn sale-and-leaseback programme to take advantage of the surge in the investment market.

The supermarket giant is bringing forward its next tranche of properties to the market to capitalise on the current bubble of large numbers of buyers chasing a scarcity of stock.

Tesco is thought to have presented up to £1bn of property to investors, although it may sell this in a number of smaller chunks.

A Tesco spokesman said: “There is good interest in sale and leasebacks at this time. Funds are back looking for the right deal with cash to invest, particularly on properties let to strong covenants like Tesco. We are talking to people on our next deal.”

It is thought that yields for the Tesco properties have even dipped below 5.3%, the level at which its last tranche of properties transacted.

Greg Nicholson, chairman of UK capital markets at CB Richard Ellis, said: “Prime shop yields have seen a 0.75% yield improvement from 6% to 5.25% over the last 12 months but for prime supermarkets, this yield shift has been even more marked — a 1% yield shift from 6% to 5% over the last six months. The supermarket retail asset class has more depth today and, often, there are more than 10 bids for any property that comes to the market.”

Tesco raised £637m from its portfolio in September through a £559m securitisation of 17 properties — 15 supermarkets and two distribution warehouses — by selling commercial mortgage-backed securities at a price of gilts plus 220 basis points.

It also completed the sale and leaseback of two food stores in Hertfordshire and Oxfordshire with LaSalle Investment Management for £78m, a yield of 5.29%.

Julian Stocks, Jones Lang Lasalle’s head of UK capital markets, said: “In the last few months we have switched from lots of overseas buyers in London and the UK to the retail funds and REITs who have now joined the party.

“Demand is very strong and a lack of vendors and lack of stock is pushing prices up, perhaps at a time when the occupational market is still weak.”

Tesco announced in April 2006 that it was embarking on programme to raise money from its vast property portfolio through joint ventures and other transactions. It has since met with success, selling large portfolios and forming joint ventures with buyers including Prupim and British Land.

Morgan Williams advises Tesco. Sphere: Related Content