Altera: The power of supermarkets and neighbourhood shopping centres
This article was originally written in Dutch. This is an English translation.
While many retail segments are under pressure due to changing consumer behaviour and price fluctuations, convenience retail remains a stable and predictable investment category, according to Philip Hosman of Altera. In conversation with Financial Investigator, he explains why supermarket locations and neighbourhood shopping centres offer an attractive mix of predictable cash flows, limited sensitivity to economic cycles and social relevance.
By Esther Waal
How does convenience retail contribute to stable and predictable investments?
‘The Dutch retail market has three primary segments: convenience (need-driven), comparison (want-driven) and speciality (destination-driven, such as DIY, garden centres, etc.). Whereas comparison retail (shopping areas focused on comparative and recreational shopping, such as fashion and electronics) exhibits strongly cyclical behaviour, convenience retail shows stability throughout the cycle.
Until 2016, returns ran parallel, but since then a striking polarisation has taken place. Convenience assets achieved on average 6% higher returns than Comparison retail, with peaks of up to 10% difference in recent years.
The high proportion of food-related tenants (such as supermarkets, bakeries and butchers) and other need-driven retailers (such as chemists, opticians and hairdressers) ensures consistent rental income, regardless of the economic climate. Few changes, limited vacancy rates and mostly CPI-indexed leases make convenience assets a natural core investment for institutional investors with a high direct return.
How do investments in convenience assets fit into the broader context of institutional portfolios?
‘From an investment perspective, neighbourhood shopping centres offer attractive and predictable returns. They are characterised by a high proportion of supermarkets, fresh food shops and other sector-strengthening shops, which together form a complete range of shopping options and thus generate stable visitor flows and predictable rental income.
Even in times of economic uncertainty, online competition or, for example, during the coronavirus pandemic, daily shopping remains virtually irreplaceable: people continue to go to their supermarket and chemist out of necessity.
Our organisation made a strategic decision to pursue this investment strategy back in 2017. The annual indexation of rental contracts offers effective protection against inflation, while the combination of structurally low vacancy rates, long-term rental contracts and a resilient tenant mix has contributed to more stable value development than in many other retail categories.
What role do tenants play in the investment strategy for convenience assets?
‘Tenants are crucial partners in our strategy. Good and future-proof spending potential in a catchment area is very important for a well-functioning neighbourhood shopping centre. Our assets are fundamentally good locations for tenants. In addition, we strive for an optimal mix of international chains and local heroes, and we ensure that all accessibility and accessibility facilities are in order.
In order to optimise quality, we regularly conduct surveys among both visitors and tenants. We map consumer behaviour and measure tenant satisfaction on various aspects in order to serve them as well as possible.
We support tenants through our “Energy-Efficient Retailer” programme with energy analyses, sector comparisons and concrete savings measures such as roof and façade insulation, solar panels and HR++ glazing. This reduces operational costs for tenants and strengthens the ESG performance of our portfolio.
What social functions do neighbourhood shopping centres fulfil in addition to facilitating daily shopping?
‘Local shopping centres are increasingly taking on a broader social function. They provide space for local amenities such as GPs, pharmacies and social services, and are accessible meeting places where people can bump into each other spontaneously. In this way, they contribute to the inclusiveness of the neighbourhood: elderly people who are less mobile, young families and people without digital skills can find the products and services they need there. In addition, more and more centres are being adapted to the needs of the neighbourhood, for example with play areas for children, seating areas for the elderly or sustainable energy facilities. In this way, social value is directly linked to the quality of the property.
For senior citizens, a visit to the shops is an outing. Many go to their neighbourhood shopping centre every day or even several times a day for both social contact and convenience. Research shows that from the age of 45 onwards, household spending increases with age. Seniors visit shops frequently and have substantial purchasing power, despite having smaller households. They like to buy fresh produce from the butcher and greengrocer and appreciate the social interaction.
This social integration increases visit frequency and strengthens the position of retailers, which directly translates into robust asset performance.
What trends do you see for the coming years regarding neighbourhood shopping centres and their role in society?
‘We see the following important developments:
Demographics: More single people and an ageing population increase the need for proximity, accessibility and social meeting places.
Food as a stable basis: The low cyclical sensitivity of food makes this segment ideal as a foundation for long-term cash flows. The non-food segment shows substantially higher volatility in cash flow.
Growth: While the total retail market is shrinking, the supermarket segment continues to expand. According to market estimates, more than 100 additional supermarkets may be needed by 2035 as a result of the growth of the Dutch population.
Supermarket margins under pressure, selectivity required: Although the Dutch supermarket sector is breaking through the €50 billion turnover barrier, labour, energy and property costs are rising in parallel, putting pressure on margins.
The investment market is becoming more selective: The yield spread between core and non-core assets is widening further. Valuations are determined by micro factors such as location, tenant mix and competitive position. This requires a focused strategy that prioritises core supermarkets of future-proof chains in areas with solid spending potential. We systematically analyse population, competition, purchasing power and online defection, and optimise where necessary by expanding floor space or improving facilities.
Price-conscious consumer behaviour: Food inflation, significantly higher than general inflation, has made consumers more critical. Our trend analyses show that consumers visit different supermarkets in search of the cheapest products and pay more attention to special offers. This has led to strong growth in private labels and discount formulas. Around 30% of consumers report a reduction in purchase volume.
What are the most important lessons for institutional investors about convenience retail?
By investing in neighbourhood shopping centres, you contribute to strong, liveable neighbourhoods and a portfolio with stable cash flows and low volatility. It provides short-term security and long-term value creation. The social power of neighbourhood shopping centres forms the foundation of their investment value.
Remain critical: supermarkets and neighbourhood shopping centres are fundamentally sound investments, but not every location is equally future-proof. Determining which are and which are not requires data-driven selection, active management and a thorough understanding of local market dynamics (such as catchment area and spending potential). We apply our data-driven expertise to manage a portfolio that delivers sustainable returns, is structurally stable and creates social added value.
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SUMMARY Convenience retail is a stable pillar within institutional investment portfolios. Neighbourhood shopping centres with strong food anchors combine predictable cash flows with social added value: they enhance the liveability, inclusiveness and social cohesion of neighbourhoods. Demographic developments mean that more supermarkets and local meeting places are needed. The valuation of convenience retail is determined by micro factors such as location, tenant mix and competitive position. Not every location is equally future-proof. An in-depth understanding of local market dynamics is necessary for a good selection. |