Forget buy-to-let! These residential REITs target returns of 8% plus

These UK residential REITs offer a quick and easy route to get invested in residential property. They are targeting total shareholder returns of at least 8%.

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Buy-to-let property has been an incredibly popular investment over the past few decades, and the UK is now estimated to have more than 2m landlords. However, the rapid pace of growth in buy-to-let investments appears to be slowing down due to recent tax and regulatory changes, which make residential lettings less attractive compared to other investments.

Prospective new investors should also bear in mind that buy-to-let investments can be incredibly time consuming and stressful. Personally, I think I spend enough time making sure my gas and electrical appliances work without worrying about someone else’s. There are also great risks involved, as lengthy void periods or tenants not paying rent could cause you to lose your property if you can’t cover the cost of your mortgage payments.

Residential REITs

However, there is another way to invest in residential property. Over the past two years, there have been a number of new UK residential real estate investment trusts (REITs) listing on the London Stock Exchange. These investment vehicles offer a quick and easy route to investing in residential property and enable shareholders to spread the risk across multiple investment properties.

The Residential Secure income REIT (LSE: RESI), which invests in a mix of shared ownership, market rental, functional and sub-market housing, gives shareholders exposure to UK house price movements combined with steady income streams derived from strong covenants and long leases.

The REIT, which debuted with its IPO in July 2017, seeks to deliver an inflation-linked target annual dividend of 5% and total returns in excess of 8% per annum, assuming RPI inflation of 2.5%. ReSI’s objective is to deliver long-term stable inflation-linked returns to its shareholders by acquiring high quality residential assets which comprise the stock of UK social housing providers.

With the £180m that the company has raised in its IPO, it has so far invested in 1,772 retirement residential units located across England, Scotland and Wales. These investments represent roughly £155m of the proceeds raised, which implies further acquisitions will be made as the company targets a 50% debt-to-asset ratio.

Build-to-rent

Elswhere, investors should also take a look at the PRS REIT (LSE: PRSR), which is particularly noteworthy because of its strategy of investing in newly constructed build-to-rent homes. Investing in newly-built private rented housing allows PRS to acquire new properties at a slight discount to the potential sale price on completion via forward funding of new developments.

As such, PRS is expected to earn a higher net initial yield when compared to purchasing existing housing stock. On the downside, however, operational risks may sometimes be greater due to potential construction problems and dilapidations, which could affect both rents and resale values.

PRS has completed just over 400 homes since June 2017 and has committed a further £437m for new developments, with around 1,300 new homes under construction. Under its current strategy, it will utilise roughly one-third of its equity to purchase completed assets, with the remainder used for forward fund developments within the REIT itself.

The company is targeting a 6% annual dividend yield and net total shareholder returns of at least 10% per annum, based on its IPO price of 100p.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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