Sainsbury’s this week became the latest to reveal the impact, with its results noting a £141m writedown on property, plant and equipment included in its adjusted underlying profit before tax in the year to 4 March. It also invested £560m in prices, with underlying profit before tax dipping 5% despite a 5.4% rise in group sales.

That followed this month’s announcement of a walloping £982m writedown in Tesco’s statutory profit before tax in the year to 26 February, to £1bn – primarily on property.

And Waitrose parent John Lewis made a loss before tax of £234m in the year to 28 January, ballooning from a £27m loss the previous year, largely due to property writedowns, its results showed last month.

Despite their decline in value, food stores remain comparatively attractive to investors, says Christopher Mertlitz, head of European Investments at real estate investment trust WP Carey. “It’s one of the most interesting asset classes overall and certainly within the retail space it’s been the most attractive and sought after for a while,” he says. “Even more so after Covid, when people suddenly seemed to remember you need to eat.”

But in common with all real estate assets, values have been hit by soaring interest rates. “Much of the market relates to debt-driven investors, so when their borrowing costs increase, the values of the properties they are buying fall” since the return relative to the investment lowers, says Matthew Hobbs, head of retail lease advisory at property consultancy Colliers.

So, how does it affect supermarkets? And what are they doing about it?

The losses can be enormous. “The last time there was a major writedown in supermarket property values was in 2015,” says Hobbs, driven at the time by an excess of land acquired by the retailers in the preceding ‘race for space’. “As a result, in their 2015 accounts, Tesco reported a pre-tax loss of £6.4 bn – its worst loss in its then 97-year history,” says Hobbs.

But it’s important to remember “these are non-cash writedowns”, says Mertlitz. “It’s purely an accounting-driven adjustment. As part of your audits you calculate the value of these assets. If it’s more than a certain threshold then you’re triggering a writedown and that is what has happened.”

As rates fall again, says Ben Green, director of Atrato Capital, investment adviser to Supermarket Income REIT, “I think there’ll be a rally in supermarket values, and we’ll see them go back up again, because ultimately, they’re long-duration, cashflow-type of assets, and those are worth more in a low interest rate environment.”

Indeed, the green shoots of a rally may already be emerging, with news from Font Real Estate this week of a “cautious rebound” in investor appetite in UK grocery-backed assets, following a sharp dip in 2022. The first quarter saw around £330m of deals on larger-format stores, more than the total in quarters one to three last year.

But any rally won’t necessarily make it back onto the balance sheets, says Green. The writedown – or impairment – in accounts is typically the result of a “very significant move” in values, he says. “Most companies don’t revalue their real estate on a regular basis” in their accounts, he adds.

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• Collateral consequences

In the meantime, it could affect their ability to borrow. “If you own real estate and you want to use that as collateral to borrow and raise capital, clearly that collateral will be worth less so there is less that you can borrow against it,” says Mertlitz.

The fall in the underlying value of the business could also make it “harder to raise capital on the stock market”, so there will potentially be “less money to invest”, adds Hobbs.

That may not be a pressing concern to Sainsbury’s or Tesco, with “probably the strongest balance sheets in the sector”, says Green. “The market looks at earnings, not the value of their property portfolio.”

But for others, it may be prohibitive of sale & leasebacks, since doing so will “crystallise the loss” in the form of a lower return, says Hobbs.

“This is particularly important for operators with the highest debts, as selling off portfolios has been an effective way of buying down debt.”

Green notes: “Clearly, Morrisons and Asda have been taken private so they’re very highly levered now.”

The Telegraph reported last month that Asda had kicked off a review of its £8.6bn property estate, targeting sale and leasebacks, two years after the supermarket’s acquisition by the Issa brothers and TDR Capital in a £6.8bn debt-fuelled deal.

For Morrisons it was “speculated using property was part of their plans for raising capital” following its own £7.1bn debt-fuelled takeover by Clayton Dubilier & Rice in 2021, notes Green. “The value they can do that at now will be lower.”