It’s no secret that all of the UK’s big supermarkets sit on large property portfolios.

It’s no secret that all of the UK’s big supermarkets sit on large property portfolios.

Unlocking the true value of this property has long been the target of sovereign wealth funds and mega-cap private equity funds because often the net assets of the big four, when properly valued, outweigh the market capitalisation of the grocers. 

In the world of financial engineering, the big four appear to offer an opportunity to make a quick buck by delisting them and creating a separately funded ‘opco propco’ structure which delivers an instant return to the acquirer. 

The recent specualtion surrounding Morrisons plans for its property portfolio suggests a move towards being more capital efficient which will be music to shareholders’ ears.

So how could supermarkets tap into the cash locked in their real estate? One option would be to list their property portfolios.

US hedge funds are currently putting pressure on three supermarket giants – Tesco, Sainsbury’s and Morrisons - to spin off their real estate portfolios in order to increase the property value to a more realistic level.

At present, the combined portfolios of these three grocers is estimated to be worth almost £50 billion, despite a current market value of £38.7 billion.

To unlock this potential value, supermarkets could float their stores into separately listed firms and sell off minority stakes to investors. This method was recently used successfully by the Canadian supermarket group Loblaw.

Alternatively, a retailer could unlock the value by simply selling off parts of its property. However, this would not be without risk; this decision could have a negative impact on the retailer’s profit margin as it would have to rent back the space.

One grocer which is looking to do exactly that is Morrisons. After its recent announcement of a 5.6% decline in sales, the retailer revealed that it is seeking to sell £800 million of its estate and then lease it back. Using this method, Morrisons could potentially get the company back on track by increasing returns to shareholders.

While Morrisons may be exploring this option in order to calm disgruntled investors, there are some other business benefits this could bring.

The increased cash reserves generated from selling property could be used to improve the retailer’s balance sheet, for example.

In addition, in this ultra-competitive market, retailers need cash in order to invest in drivers to grow the business, such as innovative technology and customer service improvements.

In an economic environment where commercial financing can still be tricky, there is certainly an opportunity for UK supermarkets to use the value of their property portfolios to drive investment in their business.

However, given that many of the supermarket giants experienced poor trading conditions over Christmas, it may make more sense to focus on improving the day-to-day business rather than restructuring their balance sheet.

What is clear is that many retailers are sitting on an untapped potential and their real estate may actually be worth more than the retail side of the business.

It will be interesting to see which retailers manage to use their untapped property portfolio to their advantage.

  • Dan Coen, director, Zolfo Cooper