Embattled supermarket chain Tesco still owns less than half its British retailing space - even after regaining control of 21 superstores on Friday, a Guardian analysis can reveal.
The research, which illustrates how the retailerremains exposed to a multi-million-pound timebomb of increasing rents and falling sales, comes as Tesco announced a £733m property swap with British Land, giving it sole ownership of 21 superstores it had previously offloaded into a joint venture with the property group. The partnership had required the supermarket to make rent payments to British Land.
Our analysis of Tesco’s British property portfolio – which drew information from Land Registry records, Tesco’s own store database and documents issued to City investors – details how the grocer still pays rent on more than half of its British space, after aggressive moves during its boom years raised £7bn by selling freeholds on 179 stores.
The study shows that:
- Tesco has sold off control of so many of its Extra hypermarkets and superstores that it now only controls the freehold on 57% of its largest British stores – which translates to owning around just 49% of its total British space.
- The grocer has signed rental agreements on numerous Extras and Superstores that commit it to rising rents, even if the stores are losing money.
- The agreed rent rises are linked to the Retail Prices Index (RPI) of inflation, which currently stands at 1.1% and is 0.8 percentage points higher than the more widely used Consumer Prices Index (CPI), a measure likely to be more closely linked to any price rises achievable in Tesco stores. As a result, Tesco’s rent bill is likely to rise faster than the price of a basket of goods. The grocer’s new management already considers its £1.4bn annual rent bill to be a “significant part” of its total cash flow.
The rent issue threatens to weigh on the efforts of new chief executive Dave Lewis to turnaround the struggling retailer - which saw its UK sales drop by some £600m in the first six months of its current financial year, as the supermarket chain continued with competition from discounters Aldi and Lidl. However, early signs of a recovery in Tesco sales have been suggested by recent data from industry analysts Kantar Worldpanel.
Jaime Vazquez, a retail analyst at JP Morgan, said: “Yes, [rent rises at Tesco stores] are linked to inflation. Tesco already spends more than £1bn annually. Of course this is an issue when the top line falls.”
In October - during a conference call for investment analysts hosted by Lewis, finance director Alan Stewart and then chairman Sir Richard Broadbent - Tesco revealed for the first time that it did not own 70% of its freeholds as previously assumed, instead stating that it controlled 53% of its space across the whole of the group. Analysts on that call told the Guardian that the new figure implied an even lower level of freeholds in the UK, where the vast majority of Tesco’s convenience stores are located in leasehold properties, but added that the grocer had been vague about giving details on its freehold properties.
Tesco also declined to give detailed answers to the Guardian’s questions about its freehold and leasehold stores. Instead, a spokesperson said: “As we have previously disclosed, around 53% of our property is owned [worldwide]. We have a mature leasehold portfolio developed over many years which includes varying terms, different start dates and time periods, meaning there are regular opportunities to review rental agreements.”
However, during the October conference call Lewis appeared to acknowledge a problem stemming from decisions taken by previous management, when he said: “There was, strategically and significantly, a very deliberate decision taken a long time ago on sale-and-leaseback. And it’s been a very big funder of the growth of the group over the period, but we’re now at a point where our freehold property is around 53%. And I have a rent bill - we have a rent bill of around £1.4bn a year. Now when you look at the total cash flow of the company, that’s a significant part.”
Examples of the tenancy agreements entered into by the company include the Tesco Extra on the Gateway retail park in Sunderland, which Tesco sold and leased-back two years ago. The store’s rent started at £3.9m a year, according to marketing documents issued on behalf of the retailer, and the tenancy agreement states: “The principal rent in respect of the Tesco store is subject to an annual index linked rent review, the first on 25 December 2013 linked to the Retail Prices Index. The review is subject to a minimum annual increase of 0% and a maximum of 5% regardless of actual RPI rises. The tenant has an option to surrender exercisable 13 February 2023 subject to specified conditions including the nominees still being the landlord”.
Tesco declined to say if its rents being inflated via RPI, as opposed to CPI, might cause it problems.
