Holding real estate investment trusts (REITs) has been a tough experience for investors more recently. Higher interest rates have driven net asset values (NAVs) sharply lower, impacting company earnings.
Bank of England actions have also driven up debt-servicing costs, increasing their day-to-day expenses and hampering their growth plans by limiting investment opportunities.
Fears of higher interest rates enduring mean many REITs continue to trade below value. This provides an excellent opportunity for long-term investors to nip in and grab some bargains.
Under sector rules, at least 90% of annual rental earnings must be paid out in dividends. Here are two I think are worth considering for a cheap way to target a passive income.
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Home run
Full disclosure: while Grainger (LSE:GRI) isn’t a REIT just yet, it’s scheduled to transition into one by October. This makes it worthy of consideration for those building a shopping list of possible shares to buy.
The company’s the UK’s largest landlord in the residential sector. This has two significant advantages: occupancy is high throughout the economic cycle (this was 96% as of March, latest financials show). And rents are rising sharply as Britain’s chronic homes shortage endures.
Like-for-like revenues were up 4.4% in the six months to March. To capitalise on this favourable backdrop, Grainger has a development pipeline of 4,565 homes scheduled for completion over the next few years.
I don’t believe this opportunity is reflected in the cheapness of the trust’ shares. Today, the build-to-rent (BTR) specialist trades at a 32% discount to its NAV per share of 294p, as stated at the end of March.
On the dividend front, Grainger offers a robust 4.2% forward yield for the current financial year (to September).
I think it’s a top upcoming REIT to consider for passive income growth. It hiked the interim dividend 12% for the current fiscal period.
Be mindful however, that government plans to supercharge housebuilding over the next several years could impact rental growth.
Space to grow
Warehouse REIT‘s (LSE:WHR) another cheap property stock that’s grabbed my attention. Today, its shares change hands at a 10.8% discount to today’s estimated NAV per share of 128.7p.
As its name suggests, the company lets out spaces for businesses to store and distribute goods. As a consequence, it’s well-placed to capitalise on multiple growth trends including:
- The steady growth of online shopping
- Increasing demand for ‘last mile’ logistics
- Changes to global supply chains, including the rise of ‘just in time’ inventory management
- The spike in ‘nearshoring,’ where companies bring their operations closer to home
With high exposure to cyclical sectors, rents can be less predictable than those of Grainger’s. But its focus on multi-let warehouses helps reduce (if not totally eliminate) this threat. In total, it has 409 different tenants spread across 60 sites. This provides considerable strength through diversification.
Dividends at Warehouse REIT are tipped to remain stable through to the end of the next financial year (to March 2027). And on the plus side, this means yields sit at a robust 5.7% for the period.
