Real estate investment trusts (REITs) may seem like a risky place to invest, but they can offer high yields and low valuations. Certainly, Brexit poses a major risk for the entire sector – and potentially the whole economy. Consumer confidence has declined in the last year, while business investment also appears to be at a low ebb.
However, for investors looking to generate high levels of income and capital growth, the wide margins of safety across the sector could be hugely appealing. Here are two examples of investment trusts which could be worth buying for the long run.
Reporting on Tuesday was shopping centre REIT Capital & Regional (LSE: CAL). The company’s trading performance has been upbeat, with letting activity momentum being strong following an encouraging first half of the year. In the five months to 30 November there were 15 new lettings and 18 lease renewals totalling £1.9m in contracted income. Total occupancy has increased to 96.6% at 30 November, which is up from 95.5% at 30 June.
While the national footfall index has fallen by 2.7% during the 21 weeks since the company’s half-year results, footfall inside its shopping centres has increased by 0.2%. Progress is being made on its cost reduction programme, with annualised savings of £1.8m expected by 2018. This should help to improve profitability and could lead to higher dividends in the medium term.
With a dividend yield of 7.1%, Capital & Regional seems to offer one of the highest income returns in the UK stock market at the present time. As well as this, its shares trade on a price-to-earnings (P/E) ratio of just 13.3. This suggests that they may offer upward rerating potential – especially as the company is in the process of delivering improvements to its business model.
Also offering a mix of income and capital growth potential is fellow REIT British Land (LSE: BLND). The company has a diverse range of assets which could appreciate in value in the long run – especially if Brexit concludes with a favourable deal for the UK.
With a dividend yield of 4.8%, the company offers an income return which is in excess of inflation. Although the price level may increase at a rate faster than 3% in future, there is sufficient headroom to suggest that British Land will continue to offer a real income return over the next few years.
As well as this, the company has a low valuation. It trades on a price-to-book (P/B) ratio of just 0.7. This is 30% below its net asset value, which is exceptionally cheap when the quality of its asset base is factored-in. Indeed, it appears as though the stock market has priced-in a very poor outlook for the business which does not seem to be taking hold. As such, there could be a value investing opportunity for the long run.
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Peter Stephens owns shares in British Land. The Motley Fool UK has recommended British Land Co. 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.