Real estate investment trusts (REITs) are generally viewed as attractive passive income stocks.
What is a REIT?
A REIT is a property business that builds, operates, manages, and rents buildings out to make money from them. These firms are set up in a certain way that allows tax breaks from the government.
In exchange for these tax breaks, the business must return 90% of profits to shareholders. This is the main reason why dividend seekers like them.
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.
I must admit I already own a few of these types of stocks as part of my holdings.
Properties in a REIT can cover a wide breadth of industries. Some have diversified interests, and others focus on one sector. Examples of industries include rental homes for the public, healthcare properties for the NHS, storage and warehousing facilities for e-commerce giants, retail parks, office blocks for businesses, student accommodation, and more!
Best around?
British Land (LSE: BLND) is one of the largest and oldest REITs on the FTSE.
The business is one example of a REIT that possesses a layer of diversification. It owns a number of different types of properties. Some examples include office blocks and retail parks.
Macroeconomic volatility has hurt many property stocks, due to higher interest rates and inflationary pressures. So, it’s no surprise to see the shares haven’t progressed over a 12-month period and are up less than 1%. At this time last year, they were trading for 382p, compared to 383p at present.
I like the stock for a few reasons. Firstly, the layer of diversification is a positive, as it means one burgeoning segment could offset weaker ones that are struggling. I’ve found that a lot of REITs focus on one area only.
Next, its sheer size, as well as long track record, are positive for me. The business has been around a long time, and knows a thing or two about navigating a tough economic picture. However, I’m conscious that past performance is not an indicator of the future.
Moving on, the passive income opportunity looks enticing, offering a dividend yield of over 6%. However, I do understand that dividends are never guaranteed.
Finally, the shares look decent value for money to me on a price-to-earnings ratio of just over 12.
Risks and final thoughts
Despite my bullishness, there are risks that could derail British Land. Higher interest rates are hurting property values, and in turn, its share price and sentiment.
Next, some of its segments are under pressure. For example, office blocks are being hurt by working from home trends, and retail parks are under pressure from online shopping trends continuing to soar. I’ll keep an eye on these issues, and see how they impact performance and returns.
The firm’s market position, income prospects, and diversification are plus points. Furthermore, the business has an average lease of close to five years, and an occupancy rate of over 96%. These aspects could help keep performance stable to deliver consistent returns.
I’d definitely be willing to buy some British Land shares when I next can.
