Discount on progress
To the man or woman on the street, a supermarket is simply a place to do the big weekly shop. But the industry’s retail giants are also often highly active in providing flats and homes at a time when many countries are facing a housing crisis. Providing affordable homes to the market can be a solution to market failure on behalf of traditional residential developers.
Such is the shortage of homes, the opportunity to invest and diversify into the residential market can provide a lucrative opportunity for retailers. Crucially for many supermarkets, providing residential property is also a way of appeasing and gaining the favour of local councils for the retail developments that they have designs on. However, such development is not without its risks. For businesses moving into an area that they are not traditionally involved in, they can be exposed due to a relative lack of knowledge compared to competitors. Their main business can also be dam-aged if they are distracted from selling groceries, and it leaves a retail business susceptible to fluctuations in the property cycles.
In Germany, the Tengelmann Group has been a prolific developer of residential property through its subsidiary Trei Real Estate. Most of its properties are entirely detached from developments involving stores, while Lidl and Aldi (both Nord and Süd) are highly active in build-ing flats as part of broader developments to include stores. With German discounters becoming increasing-ly active in the UK, Aldi is now looking to replicate its residential model abroad. It is not the first supermarket to be involved in residential estate in the UK, however. The UK’s biggest supermarkets such as Sainsbury’s and in particular Tesco have a history of involvement in such developments, albeit not always a successful one. “New housing is a national priority for the UK and we can build stores at the centre of new communities,” says Ciaran Aldridge, corporate property director at Aldi UK. “As a retailer that’s on track to deliver 1000 stores by 2022, we’re a natural fit for a sector that’s targeted with build-ing hundreds of thousands of new properties every year.”
Often supermarkets will be the development catalyst that makes a project feasible. They enter into joint ventures or sell off elements of a site to a house builder. “Owning or managing residential assets in the UK is not core to our model, but we see working with house build-ers and housing associations as a way of supporting our expansion plans. We’re in dialogue with several major house builders about how we might benefit from each other’s growth strategies,” adds Aldridge. In instances where traditional residential developers are looking for ways to accelerate regeneration projects, bringing in a supermarket to help attract capital to the project can pave the way for broader schemes.
Supermarkets can either take leases on stores that can then be sold to other investors (and the cash is pumped back into the broader project) or they can buy the land for the store directly. “A new store can anchor a wider development. This is particularly the case for large housing schemes that would benefit from complementary retail, and in densely-populated urban ar-eas such as London, where we’re looking to develop more of our smaller city store formats. And we see options to work with developers on either a freehold or a leasehold basis,” says Aldridge. “We approach every project differently. We want meaningful and close collaboration with developers on every new site where we’re part of a wider scheme, even if it’s not within a formal joint venture.”
Supermarkets are naturally major owners of real estate and land in particular, as they often look to buy large strategic sites that they hope they will get consent to build a store of some size on. As a result, developing residential assets around their stores is often the best way of maximising the value of the remaining land they own. A spokesman for Sainsbury’s, the UK’s second-largest supermarket chain, explains, “We have around £11bn worth of property assets and want to improve the efficiency of our estate. This drives shareholder returns, improves the customer experience and delivers regeneration benefits to local communities. We’ve been developing mixed-use sites since 2009 to provide our customers with greater shopping choice, as well as meeting strong housing demand and regenerating local communities.” The company is delivering more than 1000 homes on site and has plans that could deliver 4000 more in London. The supermarket emphasis is to develop flats in London due to the higher capital value that is achievable on residential property. This value makes it more economically viable for them to build housing; in areas with low residential value, there is likely to be little economic incentive for them to add flats or houses to their schemes anchored by stores.
Due to the inherent demand for convenience shopping, supermarkets are often found in most areas — whether they are deemed attractive for residential development or not. However, in instances where the culture of an area changes or infrastructure is introduced — and it becomes more attractive for residential development — supermarkets are often in a prime position to take advantage of this. They redevelop the sites they occupy and integrate residential units with a new food store.
This was the case for Sainsbury’s in Nine Elms in the south of London, which has partnered with residential developer Barratt London to increase the size of its current store by 20,000 sq ft and build 737 apartments. The aim is to take advantage of increased demand for housing in the area due to the forthcoming underground extension of the Northern Line. By providing such housing, the stores being operated by supermarkets also have a ready-made advantage: they have customers directly next to or on top of their stores. “Supermarket development is sometimes underwritten by the sale of residential units and there is the clear final ben-efit of creating additional market demand from future occupiers,” says Adam Challis, head of residential research at JLL.
Developing such stores can often be unpopular with local communities, however. They may want to protect local traders and town centres. This has historically led to supermarkets such as Tesco, the UK’s largest chain, owning huge land banks that they work through over a number of years, gradually integrating residential properties to appeal to councils and residents. “UK supermarkets got involved in urban residential schemes as a means to an end. Tesco famously became one of the largest holders of residential devel-opment pipeline in the UK, with more than 4000 units. This is the result of residential-led policy that meant a large-format supermarket could only be delivered in urban areas with flats above,” adds Challis.
In order to combat this, Tesco established a large residential development arm, Spenhill, to expand sites. However, the sites supermarkets own with residential capacity are only viable to build on if the supermarkets are worth building, and with weakening consumer spending in the UK in recent years, some store devel-opments have been pulled. This is particularly the case for the extra-large stores that had been planned. They proved to be increasingly unsuccessful due to the impact of online retailing on sales of peripheral goods (such as clothes and electrical items). Most notably, Tesco gave up on 14 housebuilding sites in 2015. Stores were also planned on these sites, but they were sold on to Meyer Bergman for £250m as Tesco sought cash to reinvest in its core business. So currently, supermarkets are only partly helping to address the housing shortage and are generally only involved if there is a direct and obvious benefit to their core business. Could this change in the future, though, and could a retail market ‘disruptor’ move aggressively into residential development as their primary business strategy? “The biggest hurdle is the desire of UK supermarkets to become involved in large-scale development themselves,” says Nick Vaughan, director of London residential at Savills.
“It’s imaginable though that some of the more entrepreneurial retail operators, such as Amazon following its purchase of Whole Foods, would look at a model such as this — subject, however, to the availability of land making it viable.”