Our homes are our castles and plenty of investors easily relate to the idea of investing in bricks and mortar. Since there will always be a need for real estate, investors looking for passive income have traditionally considered owning property as a top choice.
However, becoming a landlord can also turn into a full-time job when one has to mortgage, buy and manage several properties, collect rent, deal with estate agents as well as tenants, and maintain the property to an ever-higher standard.
Furthermore, since 2015, there have been several changes to the way that landlords are taxed in the UK, making it more complicated and expensive to become a landlord.
So, could there be a better way for the average investor who may not have the time or the capital to build or maintain a real estate portfolio? Yes. Investors, who unapologetically aim for yield, could easily buy top real estate investment trusts (REITs) to generate truly passive income.
Why invest in REITs?
As a company that owns, operates or finances income-producing real estate, a REIT may offer exposure to retail, residential, office or industrial properties. REITs, which were introduced in the UK in 2007, must pay out 90% of their rental income to investors.
Therefore buying shares in them could be a great way to invest in real estate. REITs are also highly liquid assets: investors can trade the shares on the stock market swiftly.
If you own a REIT, your fortunes will be tied to the ebb and flow of the property market, which as one of the sectors suffering since the 2016 Brexit vote, may not be good news. But I am ready to look past the Brexit uncertainty to see if there is a REIT with prime commercial property portfolio that is trading at a discount to book value.
One REIT I’m watching closely
Landsec (LSE: LAND), the UK’s largest listed property developer by assets, is a favourite among REIT investors. The group, which is behind London’s high-profile ‘Walkie Talkie’ at 20 Fenchurch Street, holds a portfolio of prime London property. It also owns shopping centres including Westgate Oxford, a joint venture with the Crown Estate, and a stake in the Bluewater mall in Kent.
Its current dividend yield is 5.2% so it offers a bigger passive income than investing in properties in major cities nationwide.
Let’s assume, starting with June, you invest £250/month regularly into Landsec and that the group pays 5% in annual dividends. You also allow the dividends to be reinvested and interest is compounded once a year.
Regardless of any potential capital gains on the investment, at the end of year one, your total investment of £3,250 will bring in a dividend income of £93.14 and become £3,343.14. Of course, LAND’s price may go down during the year, but your dividends will be paid into your brokerage account.
Now let’s assume that you continue to invest £250 a month regularly for 10 years. At the end of the decade, your total investment of £30,250 will earn a dividend income of £8,905.24 and become £39,155.24. I’d buy.
The group’s price-to-book (P/B) ratio of 0.67 also appeals to value investors, with a number under 1.0 indicating a potentially undervalued stock. I look forward to May 14, when the REIT reports full-year earnings and we get an update on the valuation as well as the market forecast.
