Superstore Yields and Rents

Following the recent news flow from Tesco and the increasing competition in the grocery sector, I have been asked a number of times recently about my views on yields and rents.

There has been a noticeable outwards shift in the bond prices of the securitisations that are secured by Sainsbury and Tesco stores, with Tesco's in particular suffering from the downgrade of its rating by Moody's.

Clearly, tenant quality is a factor, but the more important drivers of yield are, in my view, the underlying fundamentals of the property. For that you need to look at demographics, competition, and of course actual and market rental levels.

With retailers starting to scale back new openings (and even exit from existing stores) it is certain that the demand dynamics in the market are changing which will almost certainly have an affect on rental levels. Given that there has always been a shortage of market rental evidence in the sector it is difficult to know exactly how that will feed through. The picture for future rental growth remains unclear, the reduction in supply caused by the reduction in new schemes could be a positive, yet that is also a symptom of reduced demand.

In my view continued price deflation and the consequent margin erosion is likely to put downward pressure on rents, and that is almost certain to have an impact on yields. Investors in RPI linked lease income will need to start to consider the impact on value if indexed linked increases outstrip market rental growth.