In 2025, real estate investment trusts (REITs) continue to be a fantastic way to earn long-term passive income.
Even with the government continuously hiking taxes on real estate, owning REIT shares inside an ISA remains a powerful and legal loophole to earn rental income entirely tax-free. And with a 6.7% dividend yield from LondonMetric Property (LSE:LMP) I couldn’t help but take advantage.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A leading FTSE 100 commercial landlord
While individual households are feeling the pinch of weak economic conditions, the story’s very different for large-scale enterprises. Tesco continues to take market share even with fierce competition from retail discounters. Next has grown its profits by 13% so far this year to £387m. And Amazon just continues to dominate with earnings up a staggering 39% in its latest quarter to $21.2bn!
That’s great news for shareholders of these enterprises. But it’s also fantastic for their landlord, LondonMetric.
With tenant profits on the rise, rent continues to be paid on time even as contractual uplifts are introduced. Occupancy remains among the highest in the commercial sector at 98.1%, and the group’s gross-to-net-income ratio sits at a staggeringly high 98.5%.
As a quick reminder, this ratio shows how much rental income is being converted into profit after property-related operating expenses. Combining this exceptional earnings efficiency with a 16.4-year average lease duration and only 8% of its rental income due for renewal in the next three years, makes me believe that LondonMetric has some of the strongest cash-backed dividends in the entire FTSE 100.
But if that’s the case, why aren’t more investors rushing to capitalise on this seemingly amazing income opportunity?
What’s the catch?
Like all investments, LondonMetric has its own share of challenges and risks for investors to carefully consider. Even with robust cash flows, investor sentiment within the real estate space remains weak. And it’s not entirely unjustified.
The Autumn Budget has announced significant tax hikes through higher business rates for commercial properties like those in LondonMetric’s portfolio. While these taxes are ultimately paid by tenants, they could slow profit growth. Throw in the UK’s sluggish economic expansion, and demand for future rental space could stumble, eventually translating into future lease non-renewals.
Even beyond this threat, the company also has the headaches of higher interest rates to deal with. While the firm generates more than enough cash flow to cover its debt obligations and dividends, higher interest rates have also dragged down the valuation of its asset portfolio.
Consequently, if management decides it needs to sell a property to raise some capital, it’s going to be difficult to find a buyer. This liquidity risk is why LondonMetric shares trade at a near-10% discount to their net asset value.
A buying opportunity?
Even with the challenges and headwinds, LondonMetric continues to generate an impressive amount of cash. So much so that the business has actually raised shareholder dividends for the last 10 years in a row, on its way to reach year 11.
While interest rates remain elevated and economic growth depressed, it’s unlikely that LondonMetric shares will start to climb. And if market conditions begin to worsen, the stock could actually fall even with strong fundamentals.
Nevertheless, the dividend looks rock-solid, in my eyes. That’s why, despite the short-term risks, I’ve already added this REIT to my income portfolio.
