Investments in retail properties with a food store, drugstore or convenience store as anchor tenant offer a high degree of value stability. As seen most recently during the COVID-19 crisis, these retail segments are considered to be system-relevant and have been unaffected by closures during the lockdowns. This is also reflected by the sales figures. Whilst most retailers suffered losses in 2020, food stores were able to increase their revenues by 5.1% and drugstores achieved a total increase in sales of EUR 1 billion or 4.3%. Due to their independence of economic cycles, this type of retail property has gained in popularity amongst investors. Now that economic development is returning to normal, the question arises how and where investors will continue to benefit from yield advantages in the retail property sector going forward.
Emphasis on small formats and proximity to homes
In the food retail segment, supermarkets and discounters such as Aldi, Lidl etc. account for 70% of all stores and generate 80% of total revenues. Several trends can be identified in this regard: on the one hand, large supermarkets and hypermarkets are increasingly losing importance, which is reflected by the declining number of stores and falling turnovers - especially for the latter - during the last few years. On the other hand, customers increasingly prefer food stores which are located close to their homes. This trend has consolidated during the COVID-19 pandemic with the shift to working from home. According to a survey by PwC, the significance of “stores around the corner” has increased since the beginning of the pandemic, which has been particularly beneficial for retailers outside city centres. Against the backdrop of this development, food retailers are expanding their network of stores. 90% of all discounters are planning to enlarge their store formats, on average from 800 m2 to 1,130 m2, during the coming five years. Vacant former department store buildings in city centre areas are frequently being converted to this use class. Given the high purchase prices and decreasing rents in prime locations in German cities, high street properties with supermarkets and discounters as anchor tenants offer limited yield enhancement potential in the major cities. However, retail properties in secondary locations are benefiting from increasingly dynamic yield development.
Social trends have also impacted retail trade
Social trends are also reflected in the structure of food retail. The increasing awareness of sustainability affects not only the product offering of supermarkets and discounters but also the structure of the retailers themselves. Sales revenues from organic foods rose by a new year-on-year record of 22% in 2020 compared to between 4% and 11% in the years 2009 to 2019. The leading organic supermarket chains have extended their store network continually over the last few years.
Digitalisation has gained comparatively little importance in the food and drugstore sectors to date. Although customers increasingly use digital methods for ordering food, food deliveries have so far been a loss-making business for food retailers, for whom the significance of the online food segment is marginal with a share of just 1.4%.
Retail yields
According to the Habona Report 2021, yields in the discounter property segment declined by 20 bps to 4.6% in 2020 because of the high investor demand. The yield for supermarket properties is around 4.0%. According to data from CBRE, top yields for food stores fell by 1.3% points to 3.90% within a 12-month period.
By comparison, secondary locations are more profitable and if the properties perform an important local supply function with a limited number of competitors, the stable lease contracts offer an added advantage. With the right selection, it is still possible to achieve highly attractive yields of over 8.0% in the German retail sector.
