Buy-to-let property yields have been declining for the past decade leaving the average return at around 5% today. When you add in all the other costs of running a buy-to-let business, such as property maintenance, tax and mortgage expenses, the returns drop even further.
However, while the returns available from buy-to-let property have been falling over the past decade, yields on real estate investment trusts have been rising. And right now, several trusts offer dividend yields of more than 8%!
Outside London
Regional REIT (LSE: RGL) was established with the aim of building an attractive commercial property portfolio in population centres across the UK outside of the M25 motorway. Over the past five years, it has more than doubled the value of its portfolio to nearly £500m through the issue of new shares and debt.
It does not look as if the enterprise is going to slow down any time soon either. Regional’s focus on out-of-town business centres, warehouse facilities and offices has helped the company ride out the storm on the high street, and the demand for its properties is booming.
Back in June, the firm announced a series of lettings to new and existing tenants with an average rental uplift of 11.6%. Only a few weeks before this series of transactions was announced, Regional informed investors that it had agreed to sell a building in Sheffield 25% above its book valuation (as at December 2018). Today the company published a further positive trading update, informing investors that it has inked £1.3m of new lettings with a “major uplift” in income for the group.
To capitalise on the opportunities available in regional property markets, last month it announced a £50m placing at a 7% discount to the market price to raise money for further deals.
When these new properties start to contribute to the bottom line, City analysts reckon Regional will have the ability to pay out 8.26p per share in dividends for 2019, giving a dividend yield of 8% at the current price. Based on its track record of creating value for shareholders, I think it’s worth snapping up this income champion today.
Value opportunity
If you’re looking for property income, I also highly recommend checking out NewRiver REIT (LSE: NRR). Shares in NewRiver have come under pressure over the past two years due to the company’s exposure to the retail property market.
The firm’s critics believe that the group’s 33 community shopping centres, and 23 “conveniently located” retail parks will suffer as consumers continue to move away from bricks-and-mortar shops, and, as a result, NewRiver will have to mark down the value of its assets and possibly cut its dividend.
I think it is unlikely NewRiver will cut its dividend. But, if it does, with a dividend yield of 14% at the time of writing, even a 50% cut would leave the company yielding a highly attractive 7%.
On top of this, the stock is trading a price-to-book value of just 60%. This implies the market believes its property portfolio is worth 40% less than NewRiver is saying it is. That might be the case, but I think the market is assuming the worst-case scenario. If the worst case never happens, this could be an excellent opportunity for savvy value investors.
