Tesco, best known as the UK’s leading mid-market grocer, has signalled its entry in the Asian real estate fund market with the launch of a Thai property vehicle that has raised about $600 million.
The Tesco Lotus Retail Growth Freehold and Leasehold Property Fund launched last week as a closed-ended vehicle on the Securities Stock Exchange of Thailand. It raised Bt18.4 billion ($602 million) on its debut, making it the country’s biggest listing since 2006 and the largest real estate fund IPO since the Thai exchange began listing property funds in 2003.
The fund – managed by Krung Thai Asset Management, a unit of state-controlled Krung Thai Bank – comprises a portfolio of 17 shopping malls, each anchored by a Tesco hypermarket. It offers a 6.5% yield on Tesco properties that are being unlocked for investment on a sale-and-leaseback basis.
The portfolio is a small proportion of the company’s 133 hypermarkets in Thailand, where it also operates convenience stores and supermarkets. More properties are expected to be added to the fund in the future, according to the prospectus.
Faced with declining retail profits from its UK home base, Tesco has sought to capitalise on its global real estate holdings, which are worth about $57 billion.
Since 2006, it has generated more than $8 billion through UK property divestments – largely using the sell-and-leaseback model. For example, in January this year it raised $715 million through the sale of store-backed bonds underpinned by the sale-and-leaseback of 11 Tesco supermarkets in the UK.
Tesco is expected to further unlock the value of its properties in Asia. Since entering the region’s supermarket sector in the 1990s, it is thought to have made large capital gains on stores in Thailand and South Korea. Meanwhile, its foray into China’s retail sector – where it has struggled to gain a leading market share – is being viewed by some observers as a sideline to a possibly more lucrative mainland property play.
In China, Tesco operates seven Lifespace-branded malls that comprise about 400,000 square feet of retail space anchored by a Tesco hypermarket, with additional tenants that include cinemas and restaurants. The company plans to open 11 more in the near term, according to a company statement. Tesco declined to discuss its property divestment plans in Asia.
As Asian property funds are relatively smaller in scale to those offered by seasoned firms from the West, they may have trouble raising assets from large global institutional investors, making real estate investment trusts (reits) and other listed fund structures a more viable option, says a Hong Kong-based private equity placement agent.
Another supermarket supremo, Carrefour of France, has long been eyeing a divestment of its properties through a spin-off of its property holdings, but its plans were derailed by the 2008 financial crisis. Of its global properties worth $20 billion, about 13% are based in Asia.
Carrefour recently revived the property divestment plan, but it has met with mixed reception by shareholders, meaning that any plans for a property fund are likely years away.