A slowdown in the decline of property valuations has Supermarket Income (SUPR ) believing it has passed the worst, although investors will probably have to wait for lower interest rates to see shares rerate in the 8%-yielding, long-lease holder.

Half-year results to 31 December showed the portfolio of Sainsbury’s, Tesco and other supermarket stores suffered a 3.5% like-for-like decline because of further top-down pressure from rising interest rates and gilt yields.

However, that was a lot better than the 19% slide in the previous 12 months, though with gearing, or borrowing, net tangible asset (NTA) fell 5.4% to 88p from 93p per share. That’s left the shares at 75.5p, way off their 130p peak in the summer of 2022 when government bonds started to aggressively sell off at the threat of inflation, and on a 14% discount.

Rob Abraham, managing director of fund manager Atrato Capital, said that it may be ‘too early to say valuations are going up but sentiment has improved and the weakness seen last year has subsided’.

‘Valuations have now troughed or are close to it,’ he said, pointing out the £2.1bn of investment grocery real estate had seen in the past year.

For its part Supermarket Income concluded the sale and leaseback of a portfolio of Sainsbury’s stores for £135.1m, which saw the fund buy back two in Derby and Gloucester for a total of £38.4m at a blended yield of 6.5%.

It used the proceeds in a refinancing that reduced net debt by £83.2m to £546.8m, giving it a loan-to-value of 33% within a target range of 30%-40%. It also left an undrawn £170m and scope for further acquisitions in what Abraham called an ‘increasingly attractive investment environment’.

‘We are focusing on how we can grow our earnings by driving our existing portfolio where we can and looking to use our leverage capacity to buy some assets at attractive levels that are accretive to earnings and increase our ability to grow our dividend,’ said Abraham.

Earnings in the second half of 2023 were broadly unchanged on the prior year at £36.6m thanks to the group’s interest rate hedging arrangements, meaning the 3p dividend paid in the second half was almost entirely covered by earnings.

The payments are in line with the target of 6.06p for the financial year to end of June 2024, which is currently equal to a yield of nearly 8%.

The fall in valuations were offset somewhat by increasing rents, which had been the widespread trend in UK real estate as occupational demand remains strong against a difficult pricing backdrop.

The investment trust reported a 10% rise in passing rent to £104.7m via its acquisitions and contractual rent uplifts, with 78% of the rents on its 55 leases inflation linked. The leases have an average 13 years to run.

While inflation is falling, Abraham is unconcerned about the impact this will have on rents and said the fact the fund invests in ‘omnichannel’ supermarkets, that offer multiple services such as click and collect, and the strength of supermarket trading means there is still capacity for rent rises.

UK grocery sales grew 8% in the second half of the year and sales are expected to reach £250bn in 2024, an increase of £65bn since the Reit’s launch in 2017.

‘The sector’s non-discretionary nature ensures that it is highly resilient relative to the volatility of the economic cycle and is strongly correlated to inflation,’ said Abraham.

‘The recent peak in UK price inflation has now seemingly passed and operators are reporting volume growth both in-store and online.’  

Nick Hewson, chair of the trust, said the rise in sales meant grocery rents were ‘increasingly affordable’ and this coupled with the strong balance sheet of the trust ‘means we are well positioned to deliver long-term value for our shareholders’.