Inflation-linked income from supermarket real estate

Income investors frustrated by the low rates of interest have had to look elsewhere for alternative sources of yield. The ideal investment for anyone in this position would be a relatively low risk fund that pays a reliable inflation-linked income like a property or infrastructure investment trust, but most of these vehicles are now trading at a significant premium to their net asset value (NAV).

A new investment trust has recently floated on the London Stock Exchange that ticks all the right boxes and it is still trading close to its NAV. The Supermarket Income REIT (LON:SUPR) will invest in a portfolio of supermarket real-estate assets. Its tenants will mainly be the four largest supermarkets and these will provide the fund with a secure, long-term source of inflation-linked income.


The plan is to buy the freehold of several sites that are currently leased out to supermarkets and then use the rent to pay dividends. This is an area that the management team from Atrato Capital knows well, as they have handled the majority of the supermarket sale-and leasebacks in the UK over the last 10 years.

Five pipeline assets have been identified with a total value of £263m. These are currently let out to Sainsbury’s and Tesco and have an average unexpired lease term of 17 years with a net initial yield of 4.9%. Unfortunately the IPO only raised £100m, rather than the intended £200m, so it remains to be seen what the investment manager will do, although they have the scope to use gearing of up to 60% as they build up the portfolio.

The fund is targeting medium-term returns of 7% to 10% per annum including a target initial dividend yield of 5.5%.

All the sites have been carefully chosen and have the potential for alternative use over the longer term. For example, a supermarket in a highly-populated area that has strong transport links could potentially be changed into residential use in the future and this could result in a substantial capital gain.

The fund is targeting medium-term returns of 7% to 10% per annum including a target initial dividend yield of 5.5%, which will grow progressively with the first quarterly payment due to be declared in October.

Atrato Capital’s management fees will be 0.95% per annum of NAV (less any uninvested cash) up to £500m, then 0.75% up to £1bn, 0.65% up to £1.5bn and 0.45% thereafter. A quarter of these will be paid in shares and there is no performance fee.


There are obviously lots of risks of investing at this stage as the fund is still in the process of buying its first assets, although the initial purchases are expected to be completed within three months of admission to the market. The directors must be pretty confident though as they have recently invested a total of £1.9m in the company’s shares.

It is early days, but most of the more established sources of inflation-linked income such as the infrastructure and property investment trusts have moved on to a premium to NAV and there is a good chance that the Supermarket Income REIT will follow suit once it is up and running and paying dividends.