I think a real estate investment trust (REIT), is a good way to make a passive income for my portfolio. By investing in REITs, I can tap into the property market without having to buy property myself. I have identified three REITs on the London Stock Exchange I would add happily add to my portfolio at current levels. But first, a little more about REITs.
A REIT is an investment trust that specialises in property investment. It invests capital in a diverse array of property assets, and then pays a dividend to investors to reward them for the risk. The properties can be residential, commercial, or property developments. The REIT scheme launched in 2007 and there are currently over 50 REITs in the UK.
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Here are some of the rules a REIT must follow:
- Be listed on a recognised stock exchange with at least 35% of quoted shares held by the wider public, and not a closed group of five or fewer people
- Distribute 90% of its tax-exempt property income profit each year as a dividend — this is the part that makes investors a passive income
- Be diversified across at least three properties with each representing less than 40% of the total trusts’ assets
- Invest 75% of gross assets into property rental assets, which can include buy-to-rent property projects
In return for following the rules mentioned above, REITs are offered tax advantages compared to an ordinary investment firm. This relates to the way profits are taxed.
I believe there are some significant advantages to investing in a REIT. First, there is an element of double taxation when investing in ordinary firms and receiving a dividend. Firms’ profits are subject to corporation tax and then the dividend income I receive as an investor is also taxed. In addition to this, earning rent as an individual directly investing into property would also be liable for tax.
A REIT receives a corporate tax exemption for rental income. This allows net rental income to pass through to me as the investor without the double taxation mentioned earlier. Furthermore, I would not have to raise lots of capital to invest in a rental property myself. I could buy shares in a REIT and have access to a diverse portfolio of property investment without the hard work of managing anything myself. REITs also provide a higher shareholder return than any standard form of investment trust. REITs are popular investment vehicles, especially to make a passive income.
Risks of investing
The risks of investing in REITs that could threaten any passive income are similar for most right now. Of course, risks will differ slightly from firm to firm, such as size and diversity of portfolios.
More common risks currently affecting REITs are macroeconomic pressures and Covid-19. Rising inflation and cost of rent could affect portfolios and any dividends that REITs can distribute. The pandemic was a tough time for REITs especially as growth slowed and rent was tougher to collect. The threat of new variants is not good news and could affect growth and profitability once more. This could affect the level of payout to me as a investor.
Passive income opportunity #1
I would buy shares in Land Securities Group (LSE:LAND) for my portfolio. Often known as Landsec, it is one of the largest REITs in the UK and has a diverse portfolio of properties on its books. Diversity in a REITs portfolio is important for me as it means the risk is spread out. Landsec has property in the retail, leisure, workspace, and residential sectors. Currently its portfolio is worth £11bn.
As I write, shares in Landsec are trading for 733p. A year ago shares were trading for 712p, which is a 2% return. It is worth noting shares have not reached pre-crash levels of over 900p, making me think there is room for shares to continue upward.
I like Landsec for a few reasons. Firstly, its size, footprint, and diversity are positive. Next, recent half-year results showed me that recovery after the height of the pandemic is underway. Profit was up to £275m and further acquisitions for growth worth £616m had been purchased. Finally, it has a track record of success too, which I use as a gauge to review investment viability. I understand the past does not guarantee future success. From a passive income perspective, Landsec’s dividend yield is close to 4%, which is an attraction for my portfolio.
I would buy shares in British Land (LSE:BLND) for my portfolio. British Land has roots back to 1856, making it one of the oldest property firms in the UK. It owns close to £10bn of its own assets as well as managing a further £2bn worth of assets too with a 95% occupancy rate. British Land owns property throughout the UK but focuses on what it calls “London campuses” which is a mixture of work, living, and retail spaces in London.
As I write, shares in British Land are trading for 511p. A year ago, shares were trading for 496p, which is a 3% return.
I like British Land for a few key reasons. in my opinion, one of the best characteristics of a REIT is longevity. British Land ticks that box. Next, it is one of the largest landlords in the country. It has also been moving with the market recently in selling struggling retail assets and buying better yielding assets. Finally, it is currently undertaking a redevelopment scheme in Canada Water, London. This is one of the largest redevelopments in the country, which will boost performance and growth. From a passive income perspective, a dividend yield of over 3% is attractive too.
I would also buy shares in Big Yellow Group (LSE:BYG) for my portfolio. It is one of the largest self-storage firms in the UK. It has benefitted from the recent e-commerce boom that resulted from the changing face of retail and the pandemic.
As I write, shares in Big Yellow are trading for 1,644p. A year ago, shares were trading for 1,146p, which is a 47% return! At current levels shares look cheap with a price-to-earnings ratio of just eight. I like BYG as it is a bit different to other REITs. It specialises in self-storage solutions only, unlike than British Land or Landsec, which have a mixture of other properties. I like a bit of diversity in my portfolio.
Big Yellow has a successful track record of growth and success, which is positive. From a passive income perspective it has a dividend yield of close to 3% which is also attractive for me.