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UK supermarket property deals hit record 1.8 bln stg in 2013

LONDON, March 5 (Reuters) - Supermarket property deals in Britain hit a record 1.8 billion pounds ($3 billion) in 2013 as investor competition drove up prices, reflecting the strong appetite grocers such as Wm Morrison could tap should they decide to offload real estate.

A report by Investment Property Databank and property consultant, Colliers International on Wednesday showed deal volumes surged 50 percent in 2013 from the previous year on a 5.8 percent increase in values, the strongest annual value growth since 2010.

Morrison has come under pressure from shareholder Elliott Advisors to spin-off its real estate into a separate company, a move which the U.S. hedge fund said would push up the supermarket's share price.

The company said in September it was reviewing its 9 billion pound property portfolio, which is currently 90 percent freehold. While it stressed the majority of its core estate would remain overwhelmingly freehold, it said the review could lead to the release of surplus capital to shareholders.

"They would be talking to a very willing market," said James Watson, head of UK retail investment at Colliers International.

Properties occupied by supermarkets are highly sought after by investors such as insurers Prudential and Legal & General as such properties tend to have leases that can be twice as long as those held by standard retailers, guaranteeing steady rental income. There is also the perception that grocers are better capitalised and less risky than other retailers.

"They're more a bond investment rather than a real estate investment," said Ben Sanderson, director of international and debt investment at fund manager Hermes Real Estate, which sold a Sainsbury store in Essex, east England, to Prudential's M&G Real Estate unit last year.

Last year, supermarkets delivered a total return - includes rental income and rises in property values - of 11 percent year on year, ahead of retail at 9.6 percent and all property at 10.5 percent. The average net initial yield across the transactions was 4.75 percent.

The report showed property companies were the biggest sellers, selling 42 percent of the 59 deals last year. Retailers accounted for 29 percent, followed by institutions at 24 percent.

Analysts said competition for such properties was also exacerbated by a shortage of supply, after grocers such as Tesco and Sainsbury's announced the end of the space race and a move to smaller stores, resulting in a fall in sale-and-leaseback activity.