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J Sainsbury and Land Securities enter innovative joint venture

Europe’s retailers are between a rock and a hard place. Activist investors are pushing them to separate their vast property assets and realize value in the short term when the evidence suggests companies that continue to hold the freehold to their properties get higher returns in the long term. But UK supermarket group J Sainsbury could have found a solution for retailers in a joint venture with UK real estate company Land Securities – Harvest Partnership – announced in November.

"The venture is part of our decision to take a more active stance in managing our properties, as we announced at our prelims [on May 16]," explains Peter Baguley, J Sainsbury’s property director. That move, which accompanied a revaluation of Sainsbury’s property assets at £8.6 billion ($17.8 billion), was partly in response to demands by real estate investor Robert Tchenguiz, who built up a 10% stake in J Sainsbury earlier this year. He has urged the supermarket group to generate additional value from its property portfolio by separating it from the operating company.

"An op-co/prop-co arrangement simply isn’t right for Sainsbury’s," says Baguley. "Maintaining control of our assets is essential in order to retain the flexibility that a competitive [retailing] market demands." The solution was the 50/50 joint venture with Land Securities that will run for seven years and own the freeholds of three properties – two from J Sainsbury and one owned by Land Securities and leased by J Sainsbury – with a market value of £113.4 million. J Sainsbury has a pre-emption right to buy the assets at the end of the seven years.

All three sites have significant potential beyond standard extensions to the Sainsbury’s stores and might include mixed-use development – hence the involvement of Land Securities. Both partners intend to add properties to the partnership as well as actively pursuing other suitable opportunities together, although J Sainsbury hasn’t ruled out similar arrangements with other property companies. Harvest’s financing is already in place for the purchase of the three initial assets, although details have not been made public. Crucially, Harvest will have some gearing, although a decision on what level has yet to be taken, according to Baguley.

This arrangement is not the first of its kind in Europe, although it is a first for the UK. In France, shopping centre management firm Klepierre has created a separate vehicle, Klemur, to give sale/leaseback vendors the opportunity to convert their assets to stocks in an entity that professionally manages the assets. "The advantage for the retailer [in the Klemur or Harvest deal] is the involvement of a professional property manager that maximizes the value of their investment in real estate while they focus more on their main business," says Claudia Reich, senior analyst for listed property securities at Citigroup Property Investors in London.

In the case of Harvest, Land Securities, which has expertise in developing fully integrated shopping projects, gains three sites for redevelopment while taking on limited risk, as the anchor tenant – Sainsbury’s – is already secured, notes Reich. Sainsbury’s has an opportunity to gain much needed additional space through redevelopment of its sites to enable higher margin non-food sales. Both parties gain by diversifying their exposure to single projects through the reduction of their equity involvement.

Baguley is tight-lipped about the potential scale of opportunities to use the structure – either through Harvest or other partnerships. He does, however, say: "There are certainly more than three assets of this nature in our portfolio". But by creating value while retaining control, the Harvest model looks certain to be emulated in the retail sector, which has a reputation for rapidly copying ideas employed by rivals. "This joint venture is the best of both worlds," says Reich. "I would expect similar deals from big retail chains in the future since – it is a win-win situation for both parties involved."

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