Real estate investment trusts (REITs) can be great passive income investments. They lease properties to tenants and return their profits to shareholders – what could be simpler than that?
Being required to return cash to shareholders can create challenges that investors need to keep an eye on. But with dividend yields up to 8%, they can be well-compensated for the risks involved.
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REIT investing
As with most industries, REITs are often about having the right product in the right place. And there are two main variables for companies to consider – industry and location.
In recent years, there’s been a clear theme emerging. Demand for warehouses has surged as more and more shopping goes online and office space has become less popular.
As far as the UK goes, demand has – unsurprisingly – been strongest in London and within the M25. That’s been relatively resilient despite some of the recent shifts in the industry.
As a result, a lot of REITs have been zeroing in on the strong demand. But that’s only one half of the equation. The other half is supply.
Doing things differently
When everyone else is chasing the same obvious opportunity, there can be gaps that are worth exploiting. This is exactly what Regional REIT (LSE:RGL) looks to do.
The firm has a portfolio of properties located away from the capital. And a large number of them are office buildings – probably the least popular asset class in the industry at the moment.
As a result though, competition’s much more limited. That means customers have fewer options and landlords have stronger negotiating positions when it comes to renewing leases.
Regional REIT’s strategy is definitely an interesting one. And big dividend means there’s a strong incentive for passive income investors to take a closer look.
Risks and opportunities
Regional REIT’s portfolio is a bit of a mixed bag. It has some high-quality assets, but it also has a number of properties that are less desirable and difficult to improve in a meaningful way.
The firm’s plan is to sell these off, use the proceeds to improve its balance sheet and return cash to shareholders, and create an attractive business in the process. And that’s a really exciting idea.
This, of course, depends on the valuations the company can achieve for its assets on the property market. There are no guarantees here and this has been a challenge recently.
The issue is especially important right now, with the firm having recently refinanced its debt. There’s a question of what higher interest payments will mean for the firm’s dividend.
Dividend durability
In its latest update, Regional REIT announced that it’s targeting 8p per share in dividends for 2026. That’s down from the 9.4p the company returned last year.
A lower dividend is never a good thing, but having refinanced its debt, the firm has just navigated what should be its biggest challenges for some time. And there’s still an 8% yield on offer.
Given this, I’m looking seriously at the stock as a potential opportunity. With my portfolio mostly geared towards growth, it could offer me some nice diversification and balance.
