3 REITs I’d buy to generate a second income from property

REITs provide an affordable way to invest in commercial property, says Roland Head. He reveals his three top UK real estate buys today.

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I like the long-term income appeal of commercial property. But I can’t buy an office block or a warehouse. Instead, I invest in REIT stocks.

These real estate investment trusts can give me access to a regular income from a broad mix of commercial and industrial property.

If I wanted to invest directly in such property, I’d need millions of pounds. Using REITs, I can get started with just a few hundred.

Here are the three REITs I’d buy to get started in property investing today.

#1 Landsec

FTSE 100 REIT Landsec (LSE: LAND) owns a mixed portfolio of top-quality London office space and large regional shopping centres and retail parks.

Landsec’s focus on quality has helped it to keep occupancy high, despite changing market conditions. Modern London offices in good locations are still in demand, as are leisure and retail sites at centres such as Bluewater and Westgate.

One possible risk is that a UK recession could reverse the recovery that’s been seen during the pandemic. Landsec could be forced to cut rents in order to keep occupancy high. That could put the stock’s 6% dividend yield at risk.

There are always risks, but in my view Landsec’s strong portfolio and low levels of debt mean that the outlook should be fairly safe. I’d be happy to buy this REIT stock as an income investment today.

#2 Primary Health Properties

My second pick, Primary Health Properties (LSE: PHP), owns more than 500 GP surgeries and local medical centres around the UK.

Healthcare property is known for its long leases, and PHP’s portfolio reflects this. The trust’s average remaining lease length is more than 11 years, while 89% of its rent is paid with government funding.

This should mean that PHP can provide very reliable cash flows for the foreseeable future. The main risk I can see is that rising interest rates mean that debt costs will rise. PHP’s interest costs are mostly fixed for the next eight years, providing some protection. But I think this is still a situation that’s worth watching.

PHP shares offer a forecast dividend yield of 4.8% and trade just above their book value. That’s not especially cheap, but with occupancy at 99.7%, I think the stability of this business is worth paying for.

#3 Tritax Big Box REIT

Warehouses have been a hot investment area in recent years. One of the bigger players in this sector in the UK is FTSE 250 firm Tritax Big Box REIT (LSE: BBOX).

Key tenants include Amazon, Morrisons, and B&Q. Tritax recently reported a 0% vacancy rate, with an average remaining lease length of nearly 13 years.

Soaring prices kept me away from warehouses during the pandemic, but I reckon valuations are now starting to look more reasonable.

A UK recession could hit Tritax as demand for new warehouse space might fall. But the company’s modern properties look relatively low risk to me. I’m also reassured by the REIT’s relatively low level of debt.

Tritax shares now trade at a 30% discount to their book value of 240p and offer a 4.2% dividend yield. I think this could be a good entry point for this stock.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Landsec, Primary Health Properties, and 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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