Asda kicks off store sale & leaseback project to fund EG deal

Asda is selling a portfolio of stores which it is expected to lease back for upward of 50 years – more than double the conventional food store lease term – The Grocer has learned.

The portfolio of about 30 stores is expected to raise about half the £1.1bn the supermarket needs from property deals as funding for its takeover of EG Group’s UK and Ireland operations.

The supermarket is proposing ‘ground leases’ on the stores – a long-term lease arrangement usually lasting anywhere from about 50 to 125 years.

The arrangement – which is highly unusual in food stores – will see Asda paying less than the usual market value rent for the stores.

The deal is likely to be less attractive to traditional food store property investors, who favour conventional leases lasting about 20-25 years with rent at full market value.

Instead, Asda’s ground lease portfolio is said to be more likely to attract private equity houses.

The long lease commitment will require Asda to be highly confident in the long-term performance of the stores, while it will retain more operational flexibility across the rest of its 600-store majority freehold estate.

Read more: Everything you need to know about Asda’s acquisition of EG Group

Asda is also selling a further 25 stores with leases of up to 20 years.

New York-based investor Realty Income Corporation was this week close to buying that portfolio in a deal worth £650m, following a “competitive” bidding process, React News reported.

Together, the two projects are expected to raise the £1.1bn Asda said it needed as funding from property transactions as it announced the EG UK&I deal last month.

Real estate-focused investment bank Eastdil is advising Asda on the process.

Asda said it could not comment on the specifics of any confidential transactions. It said that as a result of EG UK&I being almost entirely a freehold estate, with circa £1.2bn of property value, the transaction would have no impact on Asda’s freehold value.

It added it would continue to retain a strong underpinning of freehold assets worth over £9.6bn following the transaction.

Font Real Estate partner Tom Edson said the sale & leasebacks were a sensible way to unlock “capital tied up in buildings that can be reinvested in the change of direction the Issa brothers [want] given Asda’s large freehold estate”.