The British Airways pension fund has set up a joint venture with the Tesco supermarket chain, through which it has bought 16 Tesco stores. The fund will now lease the stores, which comprise 2% of the chain's UK floor space, back to Tesco.
The agreement, which is for a term of 20 years with an early termination option in 2016, will allow Tesco to realize GBP445 million from its freehold estate, which it will reinvest into overseas expansion and UK store refurbishment.
The deal is the first made by Tesco since its April 2006 announcement regarding plans to realize a sum of up to GBP5 million in proceeds over the next five years through the sale and leaseback of its property.
According to The Daily Mail, Tesco chose British Airways pension fund (BAPF) from a number of bids. Both Tesco and BAPF have taken equity in the new joint venture. BAPF, which is currently negotiating a deal to close a GBP2.1 billion deficit, sourced debt funding from Deutsche Bank in London in order to buy the stores from Tesco.
According to The Herald, Tesco said that the partnership would release funding for future growth while maintaining the flexibility to operate and adapt its property assets. Through its aggressive overseas growth strategy, Tesco now operates in 12 markets across Asia and Europe and has more than half of its retail space outside of Britain.
The Daily Mail reported a spokesman for BAPF as stating that the deal coincided with the fund’s investment criteria. According to the paper, the deal concurs with a recent report from property consultancy King Sturge, which predicted increasing numbers of pension funds would move away from gilts and equities into the more reliable realm of property investment.