If you’re in the market for a UK REIT to add to your portfolio, you’re in luck. There are some cracking gems out there for income investors right now.
Dividends in UK-focused Real Estate Investment Trusts are swinging higher and will outstrip the low interest rates on savings by a massive margin.
Large-scale warehousing real estate owner Tritax Big Box (LSE:BBOX) offers an attractive 4.5% dividend and makes a great investment case. Its client roster includes a few little-known (ahem) companies by the names of Amazon, Tesco and Unilever. Despite trending upwards, the share price is not even that expensive: you’ll pay around 20 times forward earnings to get in here.
There are very few drawbacks, which I like. The sector is booming. Check out the behemoth, half-mile-long warehouses popping up by the side of the M6 and you’ll see what I mean.
In first-half results to 30 June, Chairman Sir Richard Jewson noted that the long-term market fundamentals were very positive as shoppers are switching away from the high street in droves “creating ongoing demand for logistics space to fulfil these orders.”
Return on capital employed — one of my favourite markers of management using shareholder funds properly — also looks exceptionally good. Tritax acquired established market player DB Symmetry just as the now-subsidiary won planning permission for an enormous 660,000 sq ft distribution centre, pre-let for 20 years to the Co-operative Group. Top brass also doesn’t overspend, adding assets to its portfolio around once a month.
The fact that BBOX recently upped interim dividends by 2.2% to 3.425p a share underlines my point that this is one of the best UK REIT investments out there.
Hammer and tongs
I’ll mention FTSE 250 player Hammerson because it looks a pretty attractive valuation right now.
The HMSO share price is bouncing back from a five-year downtrend, however a whopping 9.2% dividend yield and a pretty low trailing P/E ratio of 8 make me think things aren’t quite as steady as they could be.
Absolutely stonking bargains in this game tend not to be everything they’re cracked up to be (see mining mirage Sirius Minerals for reference) and dividends heading towards double-digits should be a red flag.
Keep it British
The other UK REIT I really like is British Land (LSE:BLND).
Switching its focus away from retail towards high-value commercial, BLND has a plump 5.5% dividend which looks sustainable, on a forward P/E ratio of 16.7. That’s right in my sweet spot for price versus value.
The net asset value of properties in British Land’s London-centric portfolio is 905p per share but you’ll only pay 565p. The price has gained around 75p since I last picked BLND, but I think there’s still plenty of upside to be had here.
A September investor update to the market noted how like-for-like retail sales had ticked up by 1.1% and retail leasing deals were 3% ahead of estimated rental value, bringing in £7.2m. More comprehensive half-year results are due out on 13 November.
Management just finished a £125m stock buyback, bringing 23m shares back in-house, which suggests they think the shares are undervalued. I do too.
Tom Rodgers owns no shares mentioned. The Motley Fool UK has recommended British Land Co and Tritax Big Box REIT. 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.