Tesco Signs $700M Supermarket Sale-Leaseback Deal

LONDON-Vincent Tchenguiz has signed a euro 526-million ($700-million) sale-leaseback with supermarket group Tesco, the latest British corporate to seek to release capital tied up in property portfolios. Under terms of the deal, Tchenguiz will buy 12 stores and two distribution centers from Tesco and lease the properties back to the supermarket group for 27 years.

Tesco is following Debenhams, New Look and Somerfield in the sale/leaseback market. Boots and Marks & Spencer are thought to be planning similar deals. Tesco officials say the deal was an efficient way of raising capital. "It helps us to finance our strategy and gives us flexibility to fund the odd opportunity that arises," states a spokesperson.

Jones Lang LaSalle's James Prior says retailers are now recognizing that better uses than property are available for their capital assets. He added that the weight of money in the UK property sector was driving prices up and yields down, making sale-leaseback more attractive for retailers. "In a market as strong as this there's a good opportunity for retailers to raise money," says Prior.

But the risk for those retailers is that they leave themselves vulnerable to escalating rental costs. "They're losing an element of control and gaining exposure to future rental liability," explains Prior.

Tesco's deal with Tchenguiz includes a "collar-and-cap" clause on the rental arrangements. This means annual rent increases will be linked to government inflation data and will be no lower than 1% and no higher than 3.5% each year. This offers Tesco protection from exorbitant rent rises, says the spokesperson.

Currently, more than 80% of Tesco's stores are fully owned. Even so, according to the spokesperson, Tesco has no current plans to continue selling its property.

"We need to retain a balance in the portfolio," she says. "We like to own freehold properties because it benefits our flexibility."