Savills Investment Management has issued a 'buy' rating on the UK supermarket segment on day 2 of Expo Real in Munich.
In its latest research note, Savills IM highlights how after a period of falling profits, weak balance sheets and operational restructuring, UK supermarkets are turning a corner. Leading UK operators Tesco, Sainsbury’s and Morrisons are reporting resilient retail sales as well as leaner balance sheets and supply chains, according to Savills IM.
Although there is still room for improvement, these operators’ credit risk has declined enough to justify lower yields. The supermarket segment’s current yield spread over UK government index-linked sovereign bonds boosts their attractiveness to income-focused investors.
Prime yields for food stores on inflation-linked leases are between 4.25% and 4.75%, according to Savills IM. This analysis suggests that yields could move down by approximately 30 basis points in the next 12 months as credit risk continues to decline. Index-linked leases remain attractive, since risk appetite has diminished after the June 2016 Brexit vote.
Irfan Younus, head of research for Europe at Savills IM, commented: 'Although margins are still under pressure, the UK's major supermarkets have shown encouraging recent trading figures. As long-dated income from relatively healthy covenants looks increasingly appealing to investors, we expect 2017-18 to be a more positive year for supermarkets.
'Strong online sales are boosting performance, with large supermarket operators now offering click-and-collect services and same-day grocery delivery in an attempt to curb the influence of AmazonFresh. Furthermore, Sainsbury’s acquisition of Argos and Tesco’s acquisition of Booker, among other deals, provide operators with further opportunities for growth outside the core grocery segment.'
