I think real estate investment trusts (REITs) are a great way to earn a second income from the UK housing market. For those of us who can’t afford to buy a slew of properties, REITs provide exposure to the market at a minimal cost.
REITs attract income by owning and leasing properties across various sectors, including residential, commercial and industrial. A few good examples include Land Securities Group, Unite Group and Primary Health Properties.
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Today, I’m looking at a lesser-known REIT on the FTSE 250 that was recently given a Buy rating by Goldman Sachs.
Supermarket Income REIT (LSE: SUPR) has a portfolio of 73 supermarket premises across the UK and France, hosting big names such as Tesco, Sainsbury’s, Marks & Spencer and Carrefour. It has a weighted average unexpired lease term (WAULT) of 12 years, meaning that’s the average time remaining on its leases.
With a £935m market-cap, it’s a smaller REIT compared to some of its FTSE 100 counterparts. It’s also currently unprofitable, taking a £65.8m write down in its latest earnings report.
However, based on analyst forecasts, it appears to have promising growth potential. Analysts forecast earnings per share (EPS) to grow at a rate of 75% a year going forward — almost double the industry average of 39%. If they’re accurate, it should return to profitability in early 2025.
Attractive dividends
Despite the fall in earnings, the company continues to pay a handsome dividend. Since 2018, its dividend payments have been steadily increasing, from 5.63p per share to 6.06p.
With no sign of cuts on the horizon, the 8% yield could make the stock an excellent second-income earner. For example, a £10,000 investment could grow to around £26,500 in 10 years with dividends reinvested. That amount would pay almost £2,000 in annual dividends.
In 20 years, the dividend payments would be over £5,000 a year if the yield held. Naturally, any share price growth would increase this figure further.
Risks
The property market’s very sensitive to economic shifts and Supermarket Income REIT felt the effects of this in 2022 and 2023. As inflation soared and the economy contracted, the share price tumbled 47.4% over the space of 12 months.
There’s no guarantee the current recovery will continue, so the shares could take another dive if the economy goes south. For now, its debt situation’s manageable with a debt-to-equity ratio of 0.62. If that increases any further, it could be an issue. So the stock appears more reliant on the current economic recovery than some other stocks.
Should I buy the stock?
There are many things I like about the stock. With an 8% yield at today’s prices, it’s considerably higher than the 3.5% average of FTSE 100 stocks.
And with a portfolio spanning several of the UK’s top supermarket chains, it should bring in reliable revenue for the foreseeable future. But it does have some risk associated with the shaky economic situation at present.
Ultimately, I think the higher-than-average dividend yield combined with decent growth potential presents a good opportunity. That puts it firmly on my list of stocks to buy next month for my income-focused dividend portfolio.
