Supermarket Investment Opportunities In North Island Growth Areas

The New Zealand subsidiary of publicly-listed Australian company Woolworths Limited is selling two of its property assets, offering outstanding investment credentials given the locations and long-term leases.

The two Woolworths New Zealand-owned standalone fully-leased modern supermarkets are in Orewa, north of Auckland, and Papakowhai in Wellington.

The freehold land and buildings have new initial 10-year leasebacks to Countdown, one of the country’s largest companies and employers, with rights of renewals to potentially extend Countdown’s occupation of each asset until 2080.

The two properties, which are offered for sale individually or together as a portfolio, have a combined gross lettable area of 6,875 square metres and a total net income in excess of $2 million annually.

Marketed by Bayleys – led by Peter Gorton and Ryan Johnson and supported by colleagues in Orewa and Wellington – the two properties are for sale by tender together as a portfolio, or individually, closing August 6 (unless sold prior).

Gorton said even pre-Covid-19, the supermarket sector was amongst the most resilient investment asset class in New Zealand, offering low volatility and strong returns.

“The pandemic environment has further strengthened this appeal, and there’s no denying that supermarket property assets are quintessential defensive real estate offerings,” he said.

“Aside from the non-discretionary nature of food shopping, a huge amount of analysis goes into identifying then securing a supermarket site meaning that demographic due diligence has been thoroughly addressed to give long-range confidence for investors.”

Both Countdown-occupied properties demonstrate longevity of tenure which, for investors and lenders, is key – particularly in the current lending environment.

In 2011, (then) Progressive Enterprises (now Woolworths New Zealand) purchased an existing Orewa supermarket along with additional land and buildings and created a modern supermarket reopening as Countdown Orewa in 2014 and trading solidly since.

Located just 200 metres from Orewa Beach, the 9,380-square metre site has strong underlying land value, with development-intensive zoning permitting future mixed-use residential development up to an 18-metre height limit.

“As Auckland city boundaries have pushed outwards, Orewa has broadened its residential appeal and is now home to a relatively wealthy and growing demographic with high-discretionary income,” Gorton explained.

“As an investment proposition, this property has the dual advantages of a stable income stream for the foreseeable future and the irreplaceable value of an almost one hectare beach-side site.”

Orewa’s population grew by 19.25 percent between 2013 and 2018, at an annualised growth rate in household numbers of just over 4 percent – significantly above Auckland’s 2.5-percent growth rate for the same period.

Countdown Aotea, in Papakowhai, Porirua City, around 20 kilometres from Wellington’s CBD, opened in 2017 on former caravan park land.

The purpose-built property is bordered by residential dwellings to the north, east and south, with Aotea College and the Royal New Zealand Police College to the west.

There has been a substantial amount of new residential development within the primary catchment over the past few years, and this is expected to continue with the high-profile Transmission Gully roading project expected to add further value to the broader location.

“The well-designed, split-level standalone Countdown Aotea incorporates generous carparking and has been built to exacting engineering standards – very important in the Wellington region,” Gorton said.

“Countdown Aotea is an impressive looking piece of architecture and is a real trophy asset.

“A resilient, modern supermarket supported by significant residential catchment growth and infrastructural benefits will sit well with investors and their lending partners.”

Bayleys National Director of Commercial and Industrial, Ryan Johnson, said there are recognised buyers in the market for properties with scale and strong lease covenants.

“Negative after-tax real returns from money held in the bank has seen more than $7 billion withdrawn from bank term deposits recently – so there’s plenty of investment money rattling around looking for returns with strong underlying fundamentals,” he said.

“The hunt for income is significant and investors and banks are inextricably linked in their search for lease covenant to underpin any real estate investment opportunity.

“When you can add in the underlying real estate value of well-located, flexibly-zoned land such as these Countdown-occupied assets, that’s when a property makes sense for both investors and banks.”

Johnson said that with the supermarket segment of the market proving to be “pandemic-proof”, these offerings with Woolworths New Zealand as the committed tenants are “quite frankly as good a lease covenant as you can get.”

He added that the buyer pool for such properties is broad and includes high-net-worth individuals, institutional investment groups, listed property entities, syndicates, intergenerational trusts and international investors.

“Very rarely does a standalone supermarket come to the open market and with bank term deposits into negative after-tax real returns, the sharemarket showing volatility and 10-year Government bonds returning around just 0.9 percent – an income producing asset with an exceptional lease covenant like this is very appealing,” he said.

Johnson said the properties would allow investors to apply leverage and depreciation benefits to generate total returns on funds employed in excess of 9 percent.

Woolworths New Zealand has emerged strongly from the pandemic environment with increased staffing levels, an increasing number of stores, and impressive trading results. It posted total sales last financial year in excess of $6.7 billion, and published results from the first three quarters of the 2020 financial year, show positive sales growth on last year.

Woolworths New Zealand owns and operates more than 180 Countdown supermarkets in New Zealand and is one of the country’s largest private sector employers, with 18,500 employed in its store network, support offices, processing plants and distribution centres.

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