The stock market’s on a roll this year. At just shy of 8,300 points, the FTSE 100’s climbed 7.4% year to date, or by 9.7% including dividends. Considering the UK’s flagship index has only mustered an average of around 6% over the last decade, British investors have been able to enjoy a nice rally in 2024.
It’s a similar story to the FTSE 250. Yet, despite prices moving in the right direction, there are still plenty of stocks trading at seemingly cheap discounts. In some cases, a depressed valuation makes sense.
But in others, buying opportunities could be hiding in plain sight. So with that in mind, let’s explore how I’d capitalise on the situation if I had £10k to spare right now.
Short-term losers can be long-term winners
The impact of surging inflation, higher interest rates, geopolitical conflicts, and trade route disruptions has been clear. Investors experienced one of the most severe stock market corrections throughout 2022 that haven’t been seen in over a decade. And, consequently, businesses of all sizes saw their share prices tank.
Today, the macroeconomic environment’s drastically improved. And while there’s still some damage yet to be repaired, most businesses are seemingly back on track. Yet, when looking at stock prices, a different story emerges.
Plenty of FTSE shares are still in the gutter. Real estate investment trusts (REITs) are a prime example, with the majority trading close to double-digit discounts to their net asset values (NAVs).
To be fair, the lack of confidence from investors isn’t unfounded. These types of businesses typically rely on a significant amount of debt. That makes higher interest rates a source of significant pressure on the balance sheets and dividends alike.
Yet, despite the current lack of popularity, not all businesses in this category are doomed. Some continue to churn out cash like there’s no tomorrow, hiking dividends and paying down debt. So if I had £10k to invest right now, REITs would be the first place I’d start hunting.
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Best REITs to buy in August?
When it comes to investing in real estate, I’ve always preferred going down the commercial route. Having businesses as tenants typically comes with increased reliability compared to residential, in my opinion. And it also provides the opportunity to indirectly own more lucrative properties.
Thanks to the rise of e-commerce, demand for commercial warehouses has skyrocketed over the last decade. That’s why Warehouse REIT (LSE:WHR) currently has my attention.
The company owns and leases last-mile urban warehouses used predominantly by online retailers. And shares are currently trading at a massive 31% discount to NAV. This pessimism isn’t entirely unjustified. Higher interest rates hit the company hard. And in 2022, management was forced to rebalance its portfolio, selling off underperforming properties to shore up the balance sheet.
Obviously, selling when prices are tumbling is far from ideal. However, based on the latest trading update, the worst appears to be over. Existing tenants are renewing their contracts and new customers are rolling through the door collectively paying 15.1% higher prices compared to previous rents.
As such, the group remains on track to maintaining dividends as well as improving coverage by the end of the year. And that makes the 7.5% dividend yield an attractive proposition, in my opinion.
