I’ve recently spent time searching outside the FTSE 100 and FTSE 250 indexes for top stocks to buy. The wider London Stock Exchange is packed with rock-solid UK shares that have enormous growth potential. So why should I restrict myself to only investing in Britain’s best-known names?
Residential landlord The PRS REIT (LSE:PRSR) is one ’hidden hero’ on my radar today. I’ll be hoping to add it to my own investment portfolio when I next have spare cash to spend.
A robust selection
Real estate investment trusts (REITs) can be ideal ways for investors to ride out temporary turbulence in the economy. These businesses often tie their tenants down on contracts that last for years, a strategy that keeps rental income stable.
The PRS REIT could be an especially wise pick for what could prove a tough 2024 too. Its focus on the highly defensive residential sector affords it with another layer of strength. To illustrate the point, the business collected 98% of the rents it was owed during the last financial year (to June).
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In fact, private rents in the UK are still soaring, giving the company solid momentum going into the new year. Average rents were up 6.1% during the 12 months to October, according to the Office for National Statistics. This was the biggest percentage rise since records began, and up from 5.7% in the year to September.
Against this backcloth, City analysts expect earnings at PRS REIT to soar. Bottom-line rises of 36% and 11% are forecast for the financial years to June 2024 and 2025 respectively.
Current projections leave the small-cap looking like a brilliant bargain, too. It currently trades on a price-to-earnings growth (PEG) ratio of 0.6. A reminder that any reading below 1 indicates that a share is undervalued.
I’m not surprised that the number crunchers are so optimistic. Like-for-like blended rental growth leapt to 9.8% during the three months to September. This was up from around 7% during the last financial year.
I firmly believe that tenant costs will keep ripping higher as well, with a steady exit of buy-to-let investors continuing and the UK’s population steadily increasing.
These bright profits estimates give dividend investors a lot to celebrate too. REIT rules specify that these companies must distribute at least 90% of annual rental profits out in the form of dividends.
This all means that analysts expect shareholder payouts to begin growing again after years of stagnation. Predicted dividends of 4p and 4.2p per share yield a market-beating 4.8% and 5% too.
PRS REIT’s share price could fall again in 2024 if inflationary pressures persist. It’s a scenario that means interest rates may stay higher for longer, impacting the firm’s borrowing costs and depressing its asset values.
However, I still believe that, on balance, the property stock is a great share to own in this uncertain environment.