2 absurdly cheap UK REITs I’d buy to beat the FTSE 100

UK REITs offer safe harbour in stormy markets for the canny investor. The best offer upwards of 9% dividends and are backed by brilliant portfolio management.

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With stock markets swinging all over the place, there are very few safe options to buy that can protect investors against volatility. UK REITs are one good option, though.

Real estate investment trusts are a canny option for those looking for some stability in an investing world gone wild. One of the below offers a near-9% yield.

REITs are a very tax-efficient way to invest in high-value property. The vast proportion of income from this type of investment trust is distributed to shareholders as dividends.

Choosing the right UK REIT is crucial. Retail is not your friend. That means swerving away from the likes of Capital & Regional and New River Retail.

Instead look to REITs that invest in commercial warehousing, distribution centres, and office blocks. These have fared much better than their retail counterparts and the outlook is far rosier.

Box REIT clever

You will probably know the FTSE 250 REIT Tritax Big Box (LSE:BBOX) through its half-mile long logistics warehouses lining the motorways of Britain. These easy-access centres make up most of Tritax’s portfolio, which incidentally improved in value from £3.85bn to £3.94bn in the six months to 31 December 2019.

In a recent trading update chief executive Colin Godrey pointed to “strong fundamentals for 2020“. Investment volume would increase, he said, “driven by activity from overseas and institutions continuing to re-weight their portfolios“. Happily, you don’t have to be a pension fund to invest in BBOX.

Tritax has consistently improved its dividend payouts. What was a reasonable 3.9% yield in 2015, is today above 5%, so newer investors are getting a better deal. There is also much scope to increase yield in future.

The recent market dip makes shares in BBOX much cheaper than they would have been even two weeks ago. A trailing price-to-earnings ratio of 20 is not bargain basement, but it is affordable.


Strong decision-making by the AEW (LSE:AEWU) UK REIT saw its after-tax profits soar 60% in 2019 to hit £15.5m. Its main investments are 35 commercial properties across the UK, mostly outside the flagging London market.

Recent moves include offloading vacant units while investing in highly sought-after office blocks. Orion House in Oxford, for example, is rented out at £179k per annum, while bosses negotiated a 10-year deal to let Cedar House in Gloucester with improved rental payments, up from £300k to £321k.

The share price has not appreciated much in the last five years. But this is offset by an extremely attractive 9% yield that will compound very nicely over the next decade.

A current P/E ratio of 11 is also very cheap, in my view.

Clever clogs

I like to see intelligent active management in my REITs and AEW has this in spades. For example, it disposed of floors one to nine of Pearl House in Nottingham, which were less well occupied, while retaining the fully-let ground floor. It has sold off the underperforming Rockferry Retail Park in Hull for £1.8m.

This is the kind of decision-making that gives me confidence that portfolio manager Alex Short and assistant portfolio manager Laura Elkin are working hard to create better shareholder value. That also makes AEW’s target of 8p dividends per share more easily achievable.

All of the above says to me that this is a sound investment by anybody’s metric.

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.

Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT. 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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