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Supermarket REIT’s latest Tesco acquisition proves ‘further valuation slide’

Published: 09:37 24 Apr 2023 EDT

Tesco sign
Supermarket Income REIT is a real estate investment trust dedicated to investing in supermarket property across the UK

Supermarket Income REIT PLC's (LSE:SUPR, OTC:SUPIF) latest acquisition of an omnichannel Tesco store in Worcester for £38.3mln on a net initial yield of 6% is indicative of a “further valuation slide” in the UK big-box sector, according to analysts at Shore Capital Markets.

Shore Cap noted a 13.3% fall in Supermarket REIT’s portfolio valuation in the group’s recent interim results which softened yields to 5.7%.

This latest acquisition from British Steel Pension Fund and funded via proceeds from the recent Sainsbury’s Reversion Portfolio sale indicates a further 30-basis-point yield softening.

“This acquisition sets a new yield benchmark in our minds for prime and established, omnichannel Tesco and Sainsbury’s stores and would suggest the valuations for more highly leveraged Asda/Morrisons stores (with lower sales densities) have been depressed further with yields now likely to be in excess of 6.5%,” noted Shore Cap analysts.

UK supermarkets are struggling to balance inflationary pressures while remaining competitive on price, though margins are being particularly squeezed in private equity mainstays Asda and Morrisons.

Analysts weighed up Supermarket REIT’s current 6% yield valuation in spite of a tightening operating environment for most REITs, contending that “this seems at odds with the much bigger discounts currently being observed with warehouse and logistics plays” which have the benefit of tighter supply constraints that offer “superior like-for-like rental growth”.

Shore Cap gave a sell recommendation and a target price of 84p against a publication price of 84.5p.

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