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Supermarket property investor Supermarket Income REIT has seen the value of its portfolio drop by almost £250m over the past six months amid rising UK interest rates.

The group’s half-year report said the fair value of its direct portfolio investments reduced by £248.1m in the six months to 31 December, representing a 13.3% like-for-like decline.

Market value of its portfolio at the period close was £1.63bn, a net increase of £63.5m as new acquisitions of £299.1m mitigated the decline in fair value.

This valuation reflects a net initial yield of 5.5% from 4.6% in the previous period.

The group said the decline in valuation reflected the outward shift in property valuation yields due to rising interest costs and the macroeconomic environment.

A significant increase in interest rates from 0.25% in December 2021 to 3.5% in December 2022 caused a sharp increase in the overall cost of capital and subsequently drove property yields higher.

It said that valuers had been quick to respond to this higher rate environment, as illustrated by the MSCI All Property Capital Index, which was down 19% as at 31 December 2022.

“Supermarkets have proven less volatile than broader property markets but have not been immune to this adjustment,” it noted.

Overall net rental income for the six months to 31 December increased by 41% to £45.9m, up from £32.6m when compared to the same six-month period in the prior year.

Contractual inflation-linked rent reviews in the period resulted in average annualised passing rent increases in the portfolio of 3.7%, in addition to £6.2m of rental contributions from new acquisitions.

The group’s operating profit, before changes in the fair value of investment properties and share of income from joint ventures, as reported under IFRS, increased by 44% to £38m.

Chairman Nick Hewson commented: “This period has seen a very strong underlying performance of the grocery sector with the most recent data from Kantar showing 8.8% sales growth on the prior year and annualised sales now exceeding the levels seen at the height of the pandemic.

“While property valuations have decreased as a function of broader interest rate policy changes, our balance sheet remains strong. We have sold assets, shortly after the period end, worth c.40% of our market capitalisation which brings net proceeds of at least £430m over the course of the next few months. The board commits to utilise these funds in the most accretive way for shareholders.

“We have a high-quality, hand-picked portfolio of supermarket property with 100% rental collection, benefitting from being in the non-discretionary spend sector of grocery. Our secure rental income is 80% linked to inflation. Our debt is 100% fixed (or hedged to fixed) giving us a high degree of certainty of cashflows and, therefore, dividend over the medium term.”

On 17 March 2023, the company completed the sale of its interest in the SRP to Sainsbury’s for a total gross consideration of £430.9m.

Morning update

On the markets this morning, the FTSE 100 is up 0.4% to 7,593.4pts.

Risers include Ocado, up 4.9% to 501.6p, THG, up 3.5% to 66.1p and Bakkavor, up 2.7% to 107.8p.

Fallers include Wynnstay, down 3.5% to 434.1p, Nichols, down 3.4% to 1,070p and Deliveroo, down 0.6% to 85.7p. 

Yesterday in the City

The FTSE 100 ended the day up 1.1% yesterday to 7,564.3pts as stock markets continue to rebound following the banking crisis concerns.

Digital shares were boosted yesterday, with Ocado leading the way by rising 7.7% to 478p after its recent struggles.

Other risers include THG, up 4.4% to 63.8p, Naked Wines, up 4.4% to 104p and Deliveroo, up 3.9% to 86.3p

Other risers included Fever-Tree, up 3.2% to 1,244p, Tesco, up 3% to 262.5p, C&C Group, up 3% to 153.4p, SSP Group, up 2.5% to 242.5p, WH Smith, up 1.9% to 1,449p and Kerry Group, up 1.8% to 91.9p.

Fallers included Science in Sport, down 8.7% to 11.9p, Virgin Wines, down 6.8% to 41p, PayPoint, down 1.1% to 456.5p, AG Barr, down 0.8% to 505p and Associated British Foods, down 0.4% to 1,943.5p.

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