I believe there are plenty of quality cheap shares out there due to the current market volatility. One stock I think investors should take a look at is The PRSR REIT (LSE: PRSR). Here’s why.
Rental properties
PRS is a real estate investment trust (REIT). It buys houses from builders and then rents them out to tenants to make income. What I love about REITs is that they must return 90% of their profits to shareholders. This passive income opportunity is too good to ignore, and that’s the reason I already hold positions in a few REITs myself.
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As I write, PRS shares are trading for 80p. At this time last year, they were trading for 86p, which is a 7% drop over a 12-month period. Rising interest rates, as well as soaring inflation, have pushed down many stocks, hence the opportunity to pick up cheap shares. The former has played a bigger part for PRS, but more on that shortly.
The bull and bear case
I reckon PRS shares have come under pressure recently due to rising interest rates. These higher rates have played havoc with the UK housing market. Due to these higher rates and soaring inflation, house building output is down, which could hinder PRS’ growth aspirations. Plus, if the economy sinks into a full blown recession, it could be disastrous for the business, at least in the short term.
In addition to this, PRS’ longer-term business model comes under threat if interest and mortgage rates cool. This could help consumers purchase their own homes much more easily than now, therefore weakening demand for rental properties.
To the bull case then. I reckon PRS is in a great position to benefit from the property market’s current outlook. This is in the shorter and longer term. This is for two reasons. Firstly, there’s no end in sight for higher interest rates. Increased rates make mortgages harder to obtain so people are looking for more affordable rental accommodation. Next, demand for housing is outstripping supply. The shortfall could boost businesses like PRS and increase its performance and payouts too.
Moving on, PRS trades on a price-to-earnings ratio of 10, making it one of a number of cheap shares that have caught my eye. In addition to this, a dividend yield of 5% is higher than the FTSE 100 average yield of 3.9%. However, I’m conscious dividends are never guaranteed.
Cheap shares for everyone
To conclude, I reckon PRS shares won’t stay at such levels for too long. As demand for rental properties continues to increase, as well as a murky property market and house building output decreasing, the business should see its performance boosted. I expect the share price to begin heading upwards.
I would personally be willing to buy some PRS shares when I next have some investable cash. The passive income alone looks enticing. Plus, the general outlook of the economy should help boost the business and its shares.
