UK shares have had a great 12 months but there are still plenty of cheap real estate investment trusts (REITs) offering generous returns to consider. With a 7.3% yield, the one that stands out to me is Supermarket Income REIT (LSE:SUPR).
It means anyone investing £20,000 in the stock could earn £1,460 in passive income this year, equivalent to £122 a month. But does this make it a fabulous opportunity for income investors? Let’s see.
What does it do?
In common with many REITs, Supermarket Income has a simple business model. It buys properties – in this case large grocery stores in the UK and France – and rents them to blue-chip tenants on long-term leases.
HMRC requires REITs to return at least 90% of the profit from their rental business to shareholders in dividends. In theory, this means they receive approximately the same return as if they owned the property directly.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Of all the various types of commercial property available, I think supermarkets are an excellent choice. Although an increasing amount of shopping is done online for collection or home delivery, most of the UK’s grocers use their stores to fulfill these orders. In my opinion, the demise of large shops has been greatly exaggerated.
Indeed, Supermarket Income has 100% occupancy of its properties.
Growing nicely
A look back at the results of the REIT for the past five financial years, shows good progress in improving its cash flow from operating activities, largely as a result of expanding its portfolio.
The trust’s dividend is, generally speaking, well covered by its cash flows. The exception was during the year ended 30 June 2025 (FY25), when there was approximately £9.4m of adverse working capital changes, but otherwise, there’s been plenty of headroom.
| Financial year | Cash flow from operating activities (£’000) | Dividends paid (£’000) | Cash cover (%) |
|---|---|---|---|
| 30.6.21 | 42,804 | 34,933 | 122 |
| 30.6.22 | 63,013 | 51,084 | 123 |
| 30.6.23 | 84,319 | 67,963 | 124 |
| 30.6.24 | 92,056 | 75,335 | 122 |
| 30.6.25 | 66,134 | 73,820 | 90 |
However, as the group’s grown, its share price has fallen. When combined with its steadily increasing dividend – it was 4% higher in FY25 than in FY21 – this has contributed to a rising yield. This could be interpreted as a warning sign that its payout’s unsustainable.
| Financial year | Share price (pence) | Dividends (pence) | Yield (%) |
|---|---|---|---|
| 30.6.21 | 117.5 | 5.86 | 5.0 |
| 30.6.22 | 119.5 | 5.94 | 5.0 |
| 30.6.23 | 73.0 | 6.00 | 8.2 |
| 30.6.24 | 72.5 | 6.06 | 8.4 |
| 30.6.25 | 84.9 | 6.12 | 7.2 |
But in this case, I don’t think there’s any need to be alarmed. Although dividends are never guaranteed, with its high occupancy, 100% rent collection record over the past five years, and large number of inflation-linked leases, the payout looks reasonably secure to me.
Out of favour
The falling share price appears to be a trend among REITs. To expand, they usually have to borrow. And with interest rates rising after the pandemic they’ve seen their finance costs increasing. Also, a higher interest rate environment means investors have the opportunity to earn a good return elsewhere with less risk.
| Financial year | Interest paid (£’000) | Bank borrowings (£’000) | Effective rate (%) |
|---|---|---|---|
| 30.6.21 | 5,578 | 409,684 | 1.4 |
| 30.6.22 | 9,846 | 348,546 | 2.8 |
| 30.6.23 | 22,408 | 667,465 | 3.4 |
| 30.6.24 | 35,275 | 694,168 | 5.1 |
| 30.6.25 | 44,404 | 603,602 | 7.4 |
That’s why a key measure for the sector is the loan-to-value (LTV). In the case of Supermarket Income, its LTV was 31% at 30 June 2025, suggesting there’s plenty of leeway should the need for cash arise.
Some overlook REITs because their share prices are usually unexciting. And the commercial property sector, particularly in the UK, can be volatile.
But with its impressive track record and above-average dividend, I think Supermarket Income’s a great opportunity to consider. In fact, it’s just one of approximately 50 REITs on the UK stock market that could appeal to income investors.
