Sunday, 4 November 2012

Tesco Limavady Sold

The Roe Valley Sentinel reports that Tesco's Limavady store has been sold to CBRE Global Investors for the sum of £6,250,000. Unfortunately this does not mean that there will be one less Tesco store in the world. The transaction has been one of sale and lease back. It appears therefore that the townsfolk of Limavady may well have the debatable pleasures and advantages of this store until at least 2031. 

Why should Tesco PLC be divesting itself of a portion, albeit small, of its property portfolio? The reasons could be many. It may well make good commercial sense. The Return on Capital Employed (net operating profit divided by capital employed) currently enjoyed by Tesco is variously reported as being between 13.13% and 14.22%. If a property is sold then clearly the capital employed is reduced. With the lease back there will of course be an affect on the net profit. This will be reduced by the amount of the rental now payable less any borrowing costs saved. Provided therefore that the rent to be paid for the Limavady store is less than say 13.13% of the net sale proceeds then Tesco should at least initially be better off and be able to point to a higher ROCE. 

I don't suppose that Tesco will divulge what rental sum they will be paying to their landlord but with prime retail rents in Belfast  running at some 6.75%  and secondary Belfast retail rents giving a return of approximately 9.75% it would not be surprising if they they were paying a rental equating to a percentage return for the new landlord of some 8-9%. How capital values move as against future rental payments is rather unpredictable. Some might say that Tesco is making this sale at the bottom of the property market. Only the future will determine whether the policy of sale and lease back will prove to be the correct commercial decision.

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