Retirement investors could stand to benefit from the inclusion of commercial property in their portfolios. With bond yields at unprecedentedly low levels, commercial property is an attractive alternative which offers potentially greater returns and long-term secure cash flows.
Commercial property also has a low level of correlation to fixed income and equities asset classes, and this makes it an important investment to include as it can help to diversify risk and reduce overall volatility in a portfolio.
However, building your own property portfolio may not be an option for most investors as it requires large, upfront amounts of capital and is potentially very time-consuming. Most investors would instead benefit from putting their money into real estate investment trusts (REITs), quoted companies which own and manage income-producing property portfolios. As such, REITs offer a way for investors to access the property market without having to buy property directly.
With this in mind, I’m taking a look at two tempting high-yield REITs.
Hansteen Holdings (LSE: HSTN) is undergoing a major transformation as the pan-European REIT sells off its entire property portfolio in Germany and Netherlands for €1.28bn. This leaves the company with investments in the UK totalling £677m, with another £35m invested in Belgium and France.
The company is also looking to increase its UK exposure, with Hansteen seeking to buy beleaguered Industrial Multi Property Trust (LSE: IMPT) for 330p per share. IMPT has a property portfolio valued at £86.2m with an annual rent roll of around £8m, but is highly geared, with a loan-to-value ratio of 73% .
Given IMPT’s estimated adjusted NAV figure of 307.4p per share, I expect the acquisition to be slightly dilutive to Hansteen’s NAV in the short term. In the longer run though, the deal seems likely to be accretive given the proximity of IMPT’s properties to existing Hansteen management offices, which will likely yield significant cost synergies. There’s also the potential for NAV growth from asset management opportunities, which due to IMPT’s high debt load, may have been previously overlooked.
Looking forward, Hansteen’s shareholders could be due a hefty special dividend of up to £600m following the sale of its German and Dutch assets. And post-special dividend, shares in Hansteen could look to trade at a respectable prospective dividend yield of 5%.
One major benefit of investing in property via REITs over direct investment is diversification. A typical REIT owns a large number of properties and pursues a strategy of leasing properties to multiple tenants, with some even investing in a mix of property types associated with different business sectors.
AEW UK REIT (LSE: AEWU) is one such company — it’s a diversified small-cap which invests in office, retail and industrial space, with each of the three sectors representing roughly a third of its portfolio value.
The company is managed by AEW UK Investment Management, an affiliate of AEW Global, one of the largest real estate investment managers in the world, with more than €50bn in assets under management in North America, Europe and Asia. It has an annual management fee of 0.9% of invested NAV, with the company targeting a total annual return in excess of 12% on the IPO issue price over the medium term.
The REIT currently trades at a 7% premium to its NAV and pays its shareholders a yield of 7.8%.