Scarce sites drive continued demand for grocery retail

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Investment

A notable milestone passed almost unnoticed in the German grocery retail investment market last year: for the first time, foreign capital outpaced domestic investment in the sector. It was one of the more striking data points to emerge from a panel discussion on European retail at the Rueckerconsult INVESTMENT Expo in Berlin last week — and it set the tone for a conversation that made a persuasive case for an asset class that continues to outperform even as others struggle.

Kathrin Michalzik of Savills Investment Management, who opened the discussion, framed the investment criteria in practical terms: customer benefit, retailer quality and development potential. Does the location generate a regular, necessary shopping visit? Is the operator strong enough to sustain footfall over the long term? Can the space adapt as consumer needs evolve? These questions must be answered locally, but they apply universally. She added one observation that captured the intensity of the current location market: some sites, she noted, are developed simply to prevent a competitor from securing them. The fight for good locations has become that pointed.

The investment case was laid out with equal clarity by Christoph Horbach of Hahn Gruppe. Aldi, Rewe and Edeka issue corporate bonds yielding around 3.5–4%. The same credit quality, in the form of long-term grocery leases, delivers around 5% — with a property asset beneath it. “It is a core, perhaps even a bond-like asset class,” he said, adding that Rewe and Edeka are currently buying assets onto their own balance sheets to secure locations — a signal, in his reading, that prices are not overheated. Planning permission for large-format retail in Germany is, for practical purposes, no longer available. Good locations are being fought over; weaker sites circulate endlessly in broker databases. The gap between a genuinely good location and the rest has rarely been wider. 

Holding your own at the table

What makes grocery retail distinctive — and which demands specialist management — is the nature of the tenant base. Lidl, Kaufland, Aldi, Rewe and Edeka are globally dominant operators with multi-billion euro turnovers and highly professional real estate teams. The sector can appear deceptively simple: a small number of tenants, long leases and stable income. In practice, that simplicity is largely an illusion.

Susanne Klaußner, Managing Partner of DIR Deutsche Investment Retail, was direct on the point. “I love them all,” she said, “but sometimes I have to fight them.” These are world-class corporations, and a manager with one or two assets cannot negotiate effectively against a counterparty operating thousands of locations across Europe. Scale is not an advantage but a prerequisite.

The rent, at least, is reliable. “The rent always arrives on time,” Klaußner noted — a statement that holds across Germany and the wider European market. But the landlord-tenant dynamic is more complex than a straightforward bond comparison suggests. The best outcomes depend on knowing which parameters to push and when to concede, expertise that accumulates over years of working relationships with individual retailer teams.

That operational reality shapes investment decisions. At DIR, acquisitions are underwritten against alternative use scenarios that hold value regardless of the sitting tenant. “I want to be able to work with the property independently of whether a specific tenant is in it,” Klaußner said. “If I can think of enough scenarios, I have no problem making the investment. If I can’t, I will think carefully.” What underpins the asset’s resilience is not just tenant quality, but the flexibility of the real estate itself.

The tenant perspective, rarely heard in investment discussions, was provided by Susanne Gehle, head of real estate at Kaufland. Her message to landlords was equally direct. Kaufland commits to sites for a minimum of 15 years and invests heavily in each location. In return, it expects active, attentive asset management. “You can tell immediately which landlords genuinely care about their properties,” she said. Where that care is lacking, the retailer will increasingly step in and take control itself.

On the broader location market, she was equally candid. New development is effectively constrained, meaning that retailers and investors are competing for the same limited pool of existing sites. “We are ready for any kind of deal,” she said. “We just want to grow and secure our markets.” In that environment, ownership of location — not just tenancy — becomes strategic.

The European expansion play

The growth story for grocery retail investment is increasingly a European one. German retailers are expanding aggressively beyond their home market, while investors are following. Spain and Portugal offer yield premiums of around 100 basis points over Germany, with returns in the 6.5–7% range achievable. For managers with credible local partnerships, that represents a meaningful uplift.

Horbach pointed to the growing role of international capital in the sector, with foreign investors now accounting for a larger share of activity than domestic players. At the same time, tenants, managers and capital are all becoming more mobile. What was once a largely domestic asset class is evolving into a cross-border investment strategy.

Executing that strategy is not straightforward. Local knowledge remains critical, and partnerships are often essential to navigate unfamiliar markets. Klaußner argued that the most robust approach combines German-origin tenants with strong local operators such as Mercadona or Carrefour, diversifying both geographic and tenant exposure. The underlying investment logic may be consistent across markets, but execution remains firmly local.

What the Berlin panel made clear is that grocery retail has quietly professionalised and internationalised while other sectors absorbed the headlines. The appeal is clear: long-duration income from investment-grade tenants, structural site scarcity and a credible European growth story. But what makes the asset class attractive is also what makes it demanding. Concentrated tenant power, operational intensity and limited supply leave little room for error.

The result is a sector that appears straightforward from a distance but rewards only those with the scale, expertise and discipline to manage it properly. In a market where many traditional strategies are under pressure, grocery retail is not an easy option — it is simply one of the few that still works. And investors who once overlooked it are now being forced to take it seriously.