Buying shares in real estate investment trusts (REITs) may seem to be a risky move given the uncertainty surrounding Brexit. Already, the decision to leave the EU has caused a degree of disruption for the wider economy and for commercial property. Residential property prices have also stagnated, with confidence among businesses, investors and consumers coming under pressure.
Looking ahead, further instability may be present in the property industry. However, with the potential for high yields, wide margins of safety and relatively resilient outlooks, here are two REITs that could offer highly attractive risk/reward ratios for the long term.
Announcing an acquisition on Monday was modern primary healthcare facilities investor Primary Health Properties (LSE: PHP). It has contracted to acquire a standing let investment property in Scotland. Stenhousemuir Medical Centre will be acquired for £8.65m, with the property comprising of 2,450 square metres which is fully let to The Scottish Minister. The acquisition will increase PHP’s portfolio to a total of 305 assets with a gross value of £1.32bn and a contracted rent roll of £71.7m.
Looking ahead, the company has a strong pipeline of further acquisition opportunities. With the potential for a decrease in property prices caused by uncertainty surrounding Brexit, this could create a more inviting environment for M&A activity in the sector. As such, the company could enjoy improved trading conditions in that respect.
With a dividend yield of 4.3%, PHP offers an inflation-beating income return at the present time. With the company’s bottom line due to rise by 10% this year and by a further 7% next year, it could raise dividends still further and create an even more attractive income opportunity for its investors.
Margin of safety
Also offering an impressive outlook for income investors is European-focused REIT Redefine International (LSE: RDI). It has a range of assets in the UK and in Continental Europe which include hotels, shopping centres and retail parks. Clearly, there is a risk of downward pressure on its performance from Brexit, since the performance of retailers and hotels may deteriorate if consumer confidence continues to remain relatively weak.
Despite this risk, Redefine International could offer upside potential. Its exposure to Europe may allow it to benefit to some extent from a weaker pound, while it currently offers a relatively wide margin of safety. For example, it trades on a price-to-book (P/B) ratio of 0.95. This suggests that its share price could increase significantly without causing it to be overvalued.
Furthermore, the company has a dividend yield of 7.1% at the present time. While the resilience of its dividends may not be as high as some industries over the medium term, such a high yield suggests that the market has priced-in some uncertainty in this regard. As such, with a sound portfolio of assets which is relatively well-diversified and a wide margin of safety, Redefine International seems to be a good buy for the long run.
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Peter Stephens has no position in any of the 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.