Grocery real estate is one or the most resilient investment sectors

Grocery real estate is proving to be one of the most resilient and attractive investment sectors in the UK, with long-term demographic growth supporting rental growth and store expansion by the most successful grocers.

With few supermarket properties available on the market, investor interest remains robust, bolstered by anticipated interest rate cuts and the essential nature of grocery retail, according to new research from Colliers’ annual UK Grocery Report.

The Grocery Report highlights that the essential nature, strong fundamentals, and large scale of the supermarket subsector consistently attract real estate investors.

Over the past 12 months, however, the balance between available opportunities and capital has shifted in favour of sellers, intensifying investor interest. This shift is driven by the potential for rental growth, limited new developments, and competition for market share.

Mark Girling, Executive Director of Retail Capital Markets at Colliers, commented: “The supermarket subsector’s inherent stability and scale has always attracted real estate investors.

However, in the past year, the imbalance between investment opportunities and available capital has tilted in favour of sellers. This heightened focus on the sector is underpinned by the expectation of better returns and limited new store developments. For investors, the key to success is actively seeking new opportunities and leveraging industry insights.”

The recent £403 million joint venture between Supermarket Income REIT and Blue Owl Capital exemplifies this shift, with a target of growing the JV to £1 billion.

Furthermore, the report states that Tesco and Sainsbury’s were identified as the most traded retailers last year, with the expectation that 2025 will see increased sale and leaseback activity, particularly involving Morrisons and Asda. Prime yields for index-linked leases with 10+ years are increasingly polarised, ranging from 4.20% to 9.50% net initial yield (NIY), reflecting factors like store quality, operator covenant strength and lease duration. This dynamic is expected to continue as investor demand remains high for supermarket real estate assets.

Mark Girling continued: “Supermarket real estate continues to offer attractive risk-adjusted returns, especially given the stability of long-term leases and steady consumer demand.

 Furthermore, the report explains that after years of static rent levels on larger supermarkets, the first wave of properties from lease regears is now coming up for review. The true underlying rental values are facing closer scrutiny as landlords seek to capitalise on strong occupational demand and upward rental pressure.

Recent market activity has seen leading grocers such as Aldi and Lidl acquire mid-sized stores (18,000–24,000 sq ft), while the collapse of Homebase has released larger sites in excess of 40,000 sq ft that other grocers have rapidly acquired. Sainsbury’s and M&S have been at the forefront of former DIY store acquisitions, with the time / costs of converting to supermarket use pushing net effective rents well above headline figures.

“Grocery retail’s expanding footprint highlights both the opportunities and complexities of acquiring and repurposing large retail stores,” said Matt Hobbs, Head of Retail Lease Advisory. “These latest transactions are likely to shape open market rent review negotiations in the coming months.”

Average rents are rising across the UK, with the fastest growth in affluent areas like the South-East and within the M25. Recent deals involving M&S, who acquired former non-food stores in towns such as Dorking, Godalming and Guildford at headline rents of up to £28 per sq ft, illustrate the upward trend despite the added costs of conversion.

The UK’s population is projected to reach 70 million by 2026 and 72 million by 2032, positioning grocery stores as essential community hubs. Net immigration of 728,000 in the year ending June 2024 has further underscored the need for grocery retail expansion.

“The demographic trajectory of the UK underpins the ongoing demand for grocery retail,” said Pierre Kunkler, Director of Retail Investment. “Supermarkets are uniquely positioned to serve growing communities, reinforcing their role as stable, long-term investments.”

The grocery sector’s stability continues to attract investors, particularly as interest rates are expected to decline further in 2025. Sale and leaseback activity is projected to increase as operators optimise capital.

Greg Styles, Head of Retail Development and Advisory, commented: “Despite increasing cost pressures, the grocery sector’s fundamentals remain robust. Recent store acquisitions reflect a strategic push for market presence, particularly in areas with expanding populations. These dynamics support rental growth and sustained investor interest.”

“As grocery real estate investments continue to grow, they not only support consistent returns but also make a positive impact on local communities. Expanding grocery stores mean better access to essential services, fresh produce, and everyday goods. These investments also help create local jobs, support economic stability, and maintain competitive prices despite ongoing inflation. This synergy between investor interests and community benefits highlights the long-term value of grocery real estate in both urban and suburban settings,” said Mark Girling.