Real estate investment trusts (REITs) are a great source of passive income. And right now, they’re available at unusually low prices.
As I write, the FTSE 350 REIT index is at its lowest levels since 2012. That means the prices of UK real estate investment trusts are the lowest they’ve been for a decade.
REITs are companies that make money by leasing buildings to tenants. Their shares are publicly traded, meaning ordinary investors can buy them through the stock market.
The distinctive feature of real estate investment trusts is they pay out 90% of their income to shareholders in the form of dividends. In exchange, they get tax advantages on their profits.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Growth can be a challenge for REITs, as being required to pay out their income prevents them from reinvesting. But rent increases allow them to increase their dividends over time.
This makes them an attractive source of passive income. Rather than dealing with tenants, builders, and estate agents, investors can just buy shares and wait for the rental income.
A buying opportunity
The FTSE 350 REIT index tracks the share price of FTSE 100 and FTSE 250 real estate investment trusts. Right now, the index is at 2,046 – its lowest level since August 2012.
That means the last time UK REITs were this cheap was over a decade ago. So I think this is a great opportunity for an investor looking to earn passive income through property.
The main reason share prices are down is higher interest rates have made borrowing more expensive. As a result, demand in the property market has slowed, causing prices to fall.
REIT share prices have been heading lower as the market value of their assets drops. But demand in the rental market is still strong, meaning companies are still paying dividends.
REITs to buy
So which REITs should I buy to take advantage of the unusually low prices? I think there are interesting opportunities in various different sectors, but one in particular stands out to me.
PRS REIT (LSE:PRSR) finances the building of new houses and then leases them. With 97% of its properties occupied, the company clearly enjoys strong demand for its buildings.
I expect this to remain the case going forward, due to structural imbalances in the UK housing market. And with 99% of its most recent rent collected, its income is fairly reliable.
Following a 30% decline over the last year, PRS shares now come with a 5.5% dividend. To me, that looks like a buying opportunity, so I’m looking to add the stock to my portfolio this week.
Risks and rewards
Investing in the stock market always comes with risks. This is true both with REITs in general and PRS in particular.
The biggest risk with PRS is its debt. The company has around £364m in debt, which is high compared to an estimated £55m per year in rent.
Investors will want to keep an eye on the maturing debt over the next few years. But with its price close to an all-time low, I think it looks like a good investment to consider.