AEW UK Reit (AEWU ) has offloaded a retail property let to Nationwide building society that it warned was ‘over-rented’ and at risk of losing value.

The £158m generalist real estate investment trust, which has been the best performer in its sector in recent years, has sold its freehold high street retail building in Portsmouth for £3.9m, equal to a net initial yield of 9.9% and a 22% premium to the valuation of £3.2m at 30 June.

Laura Elkin, fund manager of the Citywire award winner, offloaded the property after completing two new lettings in the complex to Japanese restaurant Kokoro and opticians Specsavers.

Elkin said the property had posed a risk to the portfolio due to its main tenant, Nationwide building society, being ‘significantly over-rented’.

Over-renting is when the contracted rent paid by a tenant is above the property’s estimated rental value, meaning the valuation is cut when the lease expires and a new contract is agreed closer to the market value.

Elkin said the value of the asset was ‘likely to deteriorate as Nationwide’s lease becomes shorter, with the threat of the tenant leaving on expiry in 2029 creating the possibility of a long-term void’.

She said the asset management plan of the property had been completed but it also posed a ‘potential risk to…shareholders, which further justifies a sale at this point in time’.

‘The company’s focus for the deployment of capital continues to be on the consideration of further accretive investment opportunities, alongside re-investment into the existing portfolio where capex is needed in order to drive future performance gains,’ she said.

Numis Securities investment companies analyst Andrew Rees said the disposal of the retail asset ‘represents further evidence of AEW UK’s sector agnostic strategy that seeks to that crystallise value through regular disposals when income has been maximised with proceeds recycled into higher yielding opportunities’.

Rees noted that the fund has only just redeployed the recent disposal proceeds it had, snapping up a mixed-use property Bath for £11.5m at a yield of 8%, which comprises office and retail accommodation in a prime location by Bath Spa train station. Elkin also purchased a car park in York for £10m.

Although Rees expects the proceeds of the Portsmouth sale to be ‘swiftly recycled’ into new assets that will ‘boost the fund’s earnings’, he said management was still guiding to the 8p dividend being uncovered this year.

AEW UK shares are trading at 6% discount to estimated net asset value, which Rees said is ‘notably tighter than the average discount of 31%’ for peers whose dividends are slightly lower on a 6.2% average yield but typically covered by earnings.