Real-estate investment trusts (REITs) could prove to be an attractive investment over the long run. They are closely linked to the performance of the UK economy, since they receive rental income from the shops that lease their space, as well as capital growth from increases in the value of the property they own.
Indeed, with the UK economy seemingly going from strength to strength, REITs could perform well. So, which one is the most attractive?
With shares having delivered capital gains of 17% over the last year, it is of little surprise that Land Securities (LSE: LAND) trades on a relatively high price to earnings (P/E) ratio of 25.2. The effect of this on Land Securities’ yield is pronounced, since shares in the trust currently yield just 3.1%, which is rather disappointing. Furthermore, the trust’s bottom line is not expected to grow this year and, as such, it may be prudent to wait for share price weakness before new investors buy in.
As with Land Securities, shares in Hammerson (LSE: HMSO) trade on a relatively high P/E of 23.4, having risen by 20% over the last year. However, unlike Land Securities, Hammerson yields 3.6% and, more importantly, is forecast to grow its bottom line by 6% in the current year and by 12% next year. Therefore, it appears to be more attractive than Land Securities in terms of growth potential and income, although a rather high P/E means short-term share price weakness may be needed to buy in.
Encouragingly, Segro’s (LSE: SGRO) yield is a marked improvement on that of Hammerson or Land Securities. Indeed, shares in Segro currently yield an impressive 4.4%, which is much more in keeping with the generous income that a REIT should offer investors. It also trades on a lower P/E than the two previously mentioned REITs, with Segro currently having a P/E of 20.4. The major downside, though, is that earnings are forecast to fall by 6% this year, which highlights the volatility that is present in the bottom line of REITs. Still, due to its yield and relatively attractive P/E, Segro could be a strong performer in the long run.
Shares in British Land (LSE: BLND) offer investors the best compromise among the five REITs within this article. Although they don’t have the lowest P/E, the best growth prospects or the highest yield, they are the most solid performer and, as such, are attractive at current levels. For instance, a yield of 4% is not vast, but is attractive and a P/E of 21.8, although high, is still lower than two of its sector peers. Furthermore, consistent growth prospects over the next two years (8% per annum) mean that British Land appears to be a sound means of gaining exposure to UK commercial property.
Although earnings at Hansteen (LSE: HSTN) are forecast to fall by 13% this year, the trust is forecast to deliver growth of 8% next year, thereby reversing a large part of a disappointing year. However, what makes Hansteen potentially the most attractive REIT is that it offers investors the highest yield (5.2%) and yet trades on a P/E of just 15.8, which is considerably below any of the other four REITs listed here. As such, it appears attractive at current levels despite rising by over 26% during the last year.
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Peter owns shares in British Land and Land Securities. The Motley Fool has recommended shares in Hansteen Holdings.