Abrdn Property Income (API ) used ‘market dislocation’ to snap up a Morrisons’ supermarket but the portfolio value remains under pressure despite a stabilisation in the property market.

The £195m real estate investment trust (Reit) has reported EPRA net tangible assets of 81.7p in the first three months of the year, representing a 2.6% decline over the quarter. This was driven by a 0.4% like-for-like fall in capital values and the payment of an uncovered dividend of 1p per share.

The purchase cost of new acquisitions also weighed on the fund. Manager Jason Baggaley said he ‘took advantage of market dislocation to purchase a purpose-built food store and petrol filling station let to Morrisons’ by way of a sale and leaseback for £18.29m at an initial yield of 6.35%.

He said the asset will ‘perform well’ thanks to a 25-year lease and consumer price index (CPI)-linked rent reviews.

‘The purchase was funded from the revolving credit facility, and although initially the cost of servicing that debt is high, the income from the asset is higher, and that differential is expected to increase as rates decline and the rent continues to grow,’ said Baggaley.

The fund also completed the development of an industrial unit in St Helens that has been pre-let to the local authority on a 15-year lease at a rent of £657,000 a year, and achieved planning consent for a speculative development for a further 110,000 square foot with completion expected in December this year.

Baggaley said the first quarter marked ‘progress with asset management initiatives’ although the fall in the value of the portfolio was out of step with the more stable first-quarter results reported by its real estate peers.

Gavin Trodd, investment trust analyst at Numis, said the decline in the net asset value (NAV) was ‘more modest than the prior quarter, reflecting the broader stabilisation of asset values within investment markets, particularly for industrial and retail warehouse assets which saw the sharpest repricing in the fourth quarter but where occupation fundamental remain attractive’.

However, Trodd said the outcome was ‘slightly weaker than the rest of the diversified commercial peers that have reported to-date, reflecting API’s uncovered dividend and transaction costs on acquisitions during the quarter’.

The decision to use debt to fund the Morrisons acquisition also drew comment from Trodd, who noted that most Reits were ‘retaining cash and preserving balance sheet strength’ in light of market uncertainty and rising debt costs.

‘With the Bank of England expected to increase base rates further over the coming months, the cost of these borrowings will increase, eroding the extent to which this deployment is immediately accretive to income returns,’ Trodd said.

‘The company will therefore be hoping that inflation shows more tangible signs of cooling over the coming months to pave the way for a loosening of monetary policy.’

Baggaley predicted that ‘inflation should start to decline rapidly’ and this coupled with further letting success will protect the trust’s earnings and move it back towards a fully-covered dividend. The shares are currently trading on a discount of 36% and offering a dividend yield of 7.7%.

Baggaley said improved performance in the property market will be driven by the direction of the Bank of England’s monetary policy and the ‘speed at which any rate-cutting cycle is implemented’.

‘Any recovery in performance is likely to be asymmetric, with those sectors which benefit from positive underlying fundamentals – and which experience the largest correction in capital values in late 2022 – likely to see a more pronounced recovery,’ he said.

‘As a result, our outlook and forecasts for the industrial and logistics, supermarket and retail warehouse sectors have improved.’

In the near-term, Baggaley is expecting ‘further capital value declines in those sectors which are yet to experience significant outward yield movements, and which remain under structural pressure’, such as offices.