Strong investor demand for ‘pandemic-proof’ standalone supermarkets

Some investors have taken stocking up on essential items to a whole new level by buying entire “pandemic-proof” supermarkets.

Agents expect supermarkets to remain highly sought after by investors, with the coronavirus pandemic adding to demand for properties with blue-chip, daily needs tenants like Woolworths and Coles.

“Supermarket investments continue to be the most highly pursued retail sub-sector as investors target ‘pandemic-proof’ investments that offer landlords secure income provided by Coles, Woolworths, Aldi or IGA combined with large, strategically-located land holdings,” said James Wilson, Colliers International national director, retail investment services.

Standalone supermarkets have long been an investor favourite, providing a “recession-proof” income stream through their long leases to blue-chip tenants, said Stonebridge Property Group partner Justin Dowers and director Kevin Tong.

“Standalone supermarkets are rare and highly sought after by investors and have been over a long period of time, and in many instances have produced very strong results,” Mr Dowers and Mr Tong said in a joint statement.

“That has been due to some of the best investment credentials you will find in any commercial property asset including long leases, blue-chip tenants and high underlying land value.

“Daily needs tenants, like Woolworths, with an exceptional track record of performance, add another level of tenancy and rental income security which is particularly attractive in uncertain times.”

A Woolworths supermarket in the centre of NSW’s Coffs Harbour is on the market through Colliers International, while expressions of interest just closed for a Woolworths in the Victorian seaside resort of Torquay in a sale being handled by Stonebridge.

Investors are attracted to the “pandemic proof” nature of supermarket investments. Picture: realcommercial.com.au/sale

A Woolworths in the NSW regional city of Orange recently sold for $19.5 million at a yield of 5.6% through Savills Australia.

Savills Australia’s national director of retail investments Steven Lerche said the sale of Woolworths Orange reaffirmed that non-discretionary retail assets continued to ‘hit the spot’ for private investors, with demand for the retail sector underpinned by record-low interest rates, security of income, a flight to quality and the ease of management.

“This asset class remains a highly-sought-after sector of the Australian market with groups bulking up on ‘essential services’ and ‘daily needs’,” he said.

Mr Lerche said 38 freestanding Coles and Woolworths supermarkets have been sold in the last three years, with only a few sold in 2020. He pointed to other 2020 sales in regional NSW towns, with Woolworths Wadalba selling for $26.15 million on a 5.7% yield and Woolworths Lithgow fetching $14.65 million on a 5.49% yield.

Freestanding supermarkets have been in strong demand. Picture: realcommercial.com.au/sold

Savills Australia associate director, retail investments, Andrew Palmer said freestanding supermarket yields over the three-year period ranged between 2.57% and 6.25%, adding the average was tightening due to a willingness to accept lower returns.

“It is expected this trend is likely to continue into 2021 with groups eagerly looking for long-term security and cash flow,” Mr Palmer said.

Mr Wilson said an expanded group of investors were now targeting supermarkets.

“Purchaser depth for supermarket investments has grown through the second half of 2020,” Mr Wilson said.

“Whilst private investors have historically dominated the supermarket investment market, Colliers International have experienced a sharp increase in enquires from funds and syndicators targeting these assets given their attraction for investors when compared to returns for cash in bank.”

Mr Wilson said Colliers expected the limited supply for supermarket investments to continue into 2021, with growing demand driving competition for the asset class.

“The combination of record low debt and limited supply will likely lead to further yield compression for supermarket investments into 2021,” he said.

Other supermarket sales this year have included a boutique IGA supermarket in the Melbourne suburb of Malvern, a standalone Woolworths in Sydney’s Ermington and a Coles supermarket in Sydney’s West Ryde.

This Coles supermarket in suburban Sydney was sold in early 2020. Picture: realcommercial.com.au/sold

Aside from freestanding supermarkets, other supermarkets located within retail centres or malls that hit the market this year included a Coles located within Kilsyth Shopping Centre in suburban Melbourne that was bought by a private investor for $4.25 million.