The outlook for the UK property sector appears to be somewhat uncertain. Brexit has caused confidence among investors and businesses to fall to at least some degree, and this has affected the upward march of residential and commercial property prices in recent months.
Looking ahead, more volatility could be on the cards. While this may make the FTSE 100 appear to be a better buy than commercial property, due in part to its greater diversity, here are two dividend investment trusts which could outperform the wider index.
Reporting on Thursday was the F&C UK Real Estate Investment Trust (LSE: FCRE). It has enjoyed a prosperous year, with the company’s share price total return being 26.8%. This takes its total return in the last five years to 123%, which is ahead of both its benchmark and the FTSE 100. In fact its benchmark, Property – Direct UK, is up 87%, while the FTSE 100 has recorded a total return of around 43% during the same time period.
Despite its strong performance, the trust trades a premium to its net asset value of 6%. This is not exceptionally high and indicates that it could still offer good value for money. Furthermore, the company has a dividend yield of 4.7%, with dividend cover increasing to 94.4% for the full year.
While the rise in level of shareholder payouts may be somewhat restricted if the UK economic outlook remains uncertain, the F&C UK Real Estate Investment Trust offers a yield which is likely to remain well ahead of inflation. Therefore, it could be a strong income choice for the long run.
High dividend potential
Also offering FTSE 100-beating potential in the long run is shopping centre operator Intu Properties (LSE: INTU). It offers a dividend yield of 6.1%, which is more than twice the current rate of inflation. This could cause investor demand for its shares to rise if inflation moves higher, which may help them to reverse their decline of 20% over the last year.
Intu’s falling share price may be linked to uncertainty surrounding the UK economic outlook. Higher inflation has generally caused a squeeze on consumer spending in the past, and since it is higher than wage growth it could do the same in future. This means that rents may not rise as quickly as the company had previously hoped, while demand for retail space may also come under a degree of pressure.
Although Intu also has operations in Spain, the UK remains its main focus. This means that short-term volatility could be present for the business. However, with it having a price-to-book (P/B) ratio of just 0.6, it seems to offer a wide margin of safety. This could help protect its investors from further challenges in the months ahead, and may create significant upside potential which allows for outperformance of the wider index in the long run.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.