Investing in real estate investment trusts (or REITs) can be an effective way to make long-term passive income.
Like any property stock, these businesses can raise rents to protect profits from inflationary erosion. But these specific businesses are required to pay at least nine-tenths of annual profits from their rental operations out in the form of dividends.
Tax rules governing their dividends are more complex than with other UK shares. And investors should consider their own personal circumstances before jumping in. But the 90% rule means they can still be excellent ways to make a second income.
Here are two top REITS I’ll be looking to buy when I have spare cash to invest.
There isn’t enough living space to accommodate Britain’s growing student population. A weak construction pipeline suggests that this phenomenon will persist long into the future too.
So I think Unite Group (LSE:UTG) could be a great investment for long-term dividend income. Rents here grew a healthy 3.5% for the 2022/23 academic year while occupancy levels hit at an impressive 99%.
Demand for student accommodation is especially strong from overseas. So it’s encouraging for Unite that this demographic is tipped to expand rapidly. University clearing service UCAS says that “the volume of international undergraduate applicants will increase by 46% to 208,500 by 2026.”
I’m mindful that earnings here could be damaged by the cost-of-living crisis. The Observer reported that a fifth of attendees at Russell Group Student Unions universities are considering quitting due to money pressures. It’s an issue that could impact future academic years too.
Yet on balance, I think Unite remains an attractive buy for patient investors like me. The company is rebuilding dividends strongly following the Covid-19 crisis (the full-year reward rose 48% last year, to 32.7p). And City analysts expect additional dividend growth in 2023, driving the yield to a decent 3.8%.
Big Yellow Group
The self-storage market is another property segment suffering from a severe supply crunch. This is why Big Yellow Group (LSE:BYG) — a REIT whose average rents leapt 10% between October and December — is near the top of my stocks wishlist.
Demand for extra space is surging in the UK. And it’s rising for a variety of reasons, which in turn reduces the risks to the company’s revenues forecasts.
Increasing urbanisation is one reason (Statista analysts say that urbanisation has risen 3% over the past decade). Then there’s downsizing by older homeowners, a buoyant residentials market, and the rise of e-commerce. These market drivers look set to continue long into the future.
Pleasingly, Big Yellow has a strong development pipeline that should help it exploit the favourable trading environment. Today it owns 108 self-storage hubs and has a pipeline for 11 more, comprising a total of 900,000 square feet of space.
For the years to March 2023 and 2024, Big Yellow’s dividend yields sit at 3.8% and 3.9%, respectively. It’s true that the current property market downturn could hit earnings. But I still expect it to be a solid dividend payer now and in the future.