The UK real estate investment trust (REIT) sector has been under sustained pressure in 2023 as interest rates have risen. Soaring borrowing costs and a decline in net asset values (NAVs) has pushed share prices of even the most secure property stock sharply lower.
I already own several of these property stocks in my portfolio. A requirement for them to distribute at least 90% of their annual rental profits out in the form of dividends makes them attractive ways to generate a passive income.
Following this year’s share price collapse I’m considering buying these two REITs for my portfolio too. Here’s why.
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Assura
Britain’s elderly population is expected to soar in size in the coming decades. According to the Office for National Statistics, the number of people aged 75 and over is expected to almost double between now and 2039, to 10m.
Such growth will subsequently put a rocket under healthcare demand. And real estate business Assura (LSE:AGR) is one company that’s well placed to capitalise on this opportunity. It operates primary healthcare facilities like GP surgeries and diagnostics centres, footfall across which is rising as the government diverts patients from packed hospitals.
Companies like this are especially attractive in tough economic periods like this. Not only are the rents they receive basically guaranteed by government bodies. These companies also have their tenants tied down on long-term contracts (Assura’s weighted average unexpired lease term (or WAULT) stood at 11.2 years as of March).
Primary Health Properties is a REIT I’ve bought to profit from this sector. And I think the size of Assura’s dividend yield makes it another attractive buy right now. Its yield for the current financial year (to March 2024) stands at 7.4%. This is exactly double the FTSE 250 average of 3.7%.
Changes to NHS policy could damage earnings (and thus dividend growth) at the business. But right now the trading outlook looks extremely favourable.
Supermarket Income REIT
Thanks to its focus on the stable food retail market, Supermarket Income REIT (LSE:SUPR) could be another top stock to own in these uncertain times.
Importantly the company leases out its 50+ properties to some of the industry’s largest players including Tesco and Sainsbury’s. In fact these food giants account for more than three-quarters of group rental income, giving earnings and dividends an extra layer of protection.
A growing UK population means that demand for supermarket space will steadily grow. Meanwhile, Supermarket Income’s focus on omnichannel properties (which combine in-store shopping and online fulfilment) gives it improving exposure to the fastest-growing end of the market.
I’m also encouraged by the company’s sale of its stake in the Sainsbury’s Reversion Portfolio earlier this year. A gross consideration of £430.9mn for the sale of 26 stores has given it the firepower to pay down debt and explore fresh acquisitions.
Of course acquisitions always involve some degree of risk. But on balance I believe the rewards of owning this property stock make it too good to miss. One final thing: its dividend yield for this year sits at a mammoth 8.2%.
