The Real Estate Investment Trust (REIT) sector has performed poorly in 2022. The vast majority of companies in the sector have seen steep falls in their share prices.
And as their share prices have declined, so their dividend yields have risen. Buyers of the stocks today are getting a significantly higher prospective income than buyers at the start of the year.
On the face of it, generous yields — and the potential for capital gains if and when share prices recover — appear to make REITs an attractive investment opportunity.
The REIT stuff
REITs are an effective way for small investors to tap into the assets and income streams that come with real estate ownership.
There are more than 40 REITs listed on the London Stock Exchange. Some are diversified across two or more sub-sectors of the market. Some specialise in a single segment.
The biggest FTSE 100 REIT, SEGRO (formerly Slough Estates Group), owns a portfolio of big box and urban warehouses, located in and around cities and key transport hubs across the UK and Europe.
Fellow blue chips Land Securities and British Land are UK focused. The former is invested across Central London offices, major retail destinations, and mixed-use urban neighbourhoods. The latter’s portfolio includes workspace ‘campuses’, retail parks, and urban logistics sites.
Specialists
Some REITs have a narrow focus. For example, UNITE is the largest of a couple of property firms that specialise in student accommodation. And Assura is the largest of several that focus on healthcare real estate.
Other sector specialists include Big Yellow (self-storage property), PRS Reit (new-build family homes in the private rental market), and the self-explanatory Civitas Social Housing and Supermarket Income REIT.
Falling shares and rising yields
Each REIT comes with its own strengths and weaknesses. But almost all of them have seen a steep decline in their shares and rise in their yields in 2023.
The big four blue chips give a flavour of this. UNITE’s shares have fallen by 19%, Land Securities’ by 20%, British Land’s by 27%, and SEGRO’s have slumped 47%.
Today, UNITE’s shares yield 3% versus 1.7% at the start of the year. Land Securities (6.3% vs 3.9%), British Land (6% vs 3.2%) and SEGRO (3.3% vs 1.6%) likewise offer significantly expanded yields.
What’s happened?
For the last decade or so, the Bank of England (BoE) held interest rates at unprecedented low levels. Yields on cash and government bonds (gilts) — the traditional homes of risk-averse money — became so low that investors wanting any kind of return at all were driven into equities by TINA (‘There Is No Alternative’).
REITs, with their concrete assets, were one of the beneficiaries of this reluctant migration of risk-averse money into equities.
All change
Things have radically changed this year, with soaring inflation and the BoE scrambling to raise interest rates to quell it. For the first time in years, there’s been an opportunity to earn a return on ‘risk-free’ cash and gilts.
The yield on 10-year gilts reached well above 4% in the wake of the disastrous Kwasi Kwarteng ‘Mini Budget’ in September. And while things have calmed down a bit since, a 3.5% gilt yield and BoE interest rate mean nominal risk-free returns are at heights not seen for more than a decade.
REITs right now
The changed backdrop has led the market to demand lower share prices and higher yields from REITs as compensation for the relative risk of owning equities.
Personally, I think REIT yields and the potential for capital gains over time make the sector an attractive one right now for investors who are willing to embrace equity risk.
However, in looking at the many REITs available, I’m not just considering the potential upside, but also the risk in the current recessionary environment.
Gift wrapped
Some of the questions I’m asking are: how soon will the company need to refinance any debt? How much cash and borrowing facilities does it have available? And how much of a decline in property values could it tolerate?
In the case of British Land, for example, the answers to those questions are: it has no need to refinance any debt until late 2025, it has £2bn of available cash and borrowing facilities, and management has said it “could withstand a fall in asset values across the portfolio of 48% prior to taking any mitigating actions.”
As such, I think the depressed share price and high dividend yield might just represent a gift-wrapped Christmas treat from the market!
