I can see the long-term appeal of property investments. However, I’m not so keen on the practicalities of buying, owning and renting property. 

Instead, I’d buy shares in some of the UK Real Estate Investment Trusts (REITs) listed on the London Stock Exchange. And that’s because they have the potential to deliver me passive income for decades.

REITs are companies that buy, own and manage properties. And they distribute at least 90% of their property income profits to shareholders each year. But it gets even better than that.

Property companies that meet the requirements of being a REIT are exempt from corporation tax. And that means shareholders stand to gain even more returns from the underlying property investments.

An attractive valuation

There are many to choose from. But I like the look of Real Estate Investors (LSE: RLE). The company has a market capitalisation of around £63m with the share price near 34.25p. And it invests in commercial real estate assets in central Birmingham and the Midlands.

The valuation looks attractive to me. The price-to-book value is running close to 0.6. And the forward-looking yield for 2022 is a mighty 9.5%, or so. On top of that, City analysts expect the shareholder income to rise by around 5% in 2023.

In July, the first-half trading update revealed details of progress with asset sales. The company has been selling some of its properties at advantageous prices. And it’s been using the proceeds to pay down some of its debt.

In the first half of 2022, the sale of 11 assets raised £5.7m. And the directors said the prices realised represented an aggregate uplift of almost 30% on December 2021 valuations. Since the beginning of 2021, the company has raised just over £23m from asset sales. And it’s in the process of selling a further £10m worth of properties.

However, Real Estate Investors didn’t make any acquisitions in the first six months of 2022. And the directors said that was because of a “lack of suitably priced assets”. I’m encouraged by the way the company appears to be managing its portfolio with a keen eye on values.

Enhanced shareholder returns ahead?

The directors think the share price discount to the net tangible assets figure is “unwarranted”. And they are determined to do all they can to reduce the discount. And part of that is the “opportunistic” sales programme.

Looking ahead, they said If the “significant” discount persists, they’ll consider other measures. For example, a special dividend, share buybacks, or another other form of capital return to shareholders. 

The directors also said they recognise the need for market consolidation within the real estate and REIT market. And they are “alert to options that align with the interests of shareholders”. I see that comment as meaning they may consider buying other companies or even selling Real Estate Investors at a premium.

There can be no guarantees. But I reckon the company is well-positioned to deliver meaningful returns for me in the years ahead. Although it’s always possible for an economic downturn, or a property market crash to derail the firm’s plans. Nevertheless, I’m keen to buy some of the shares now.

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What is a REIT?

A REIT is an investment trust specialising in property investment. By purchasing a share in one, I can access the property market without worrying about the costs of purchasing a property or the day to day worries of managing a single property or portfolio of properties.

Why are REITs good stocks to build a passive income stream? They must legally return 90% of profits to shareholders as dividends.

I must note there are risks involved in buying such shares. Economic conditions do affect rental income, which can hurt shareholder returns. A prime example of a crisis is the 2020 pandemic and market crash. REITs struggled to collect rent and were unable to turn a profit. This meant many were unable to payout dividends in 2020.

Midlands-focused REIT

Real Estate Investors was formed in 2004 and currently possesses a property portfolio worth £195m. It focuses on commercial and residential properties and has a geographical focus on the Birmingham and Midlands area.

RLE is currently a penny stock as the shares are trading for 39p. At this time last year, the shares were trading for 37p, which is a 5% increase over a 12-month period. It’s worth noting that the shares are still below pre-pandemic levels as they were trading for 56p in February 2020 before the stock market crash.

I can see prior to the pandemic that revenue and profit grew for two years between 2018 and 2019 but in 2020 it recorded a loss due to the effects of lockdowns. I understand that past performance is not a guarantee of the future, of course.

RLE started to recover in 2021. Full-year 2021 results released in March showed revenue only £0.4m less than 2020 levels. More tellingly, it reported a profit of £13.9m for 2021 compared to a £20.2m loss in 2020. It also reported it had £9.8m cash in the bank, which boosted the balance sheet. The overall dividend for 2021 was 3.0625p, which is up 2% from 2020 levels.

Risks and verdict

Now for the bad news. RLE does face credible headwinds currently. Soaring inflation and the cost of living crisis in the UK could impact rent collection. In turn, this could impact performance and any shareholder returns as well. I will keep a keen eye on performance in these uncertain times.

At current levels, RLE shares sport a juicy dividend yield of over 7.5%. The FTSE 100 average dividend yield is 3%-4%! The shares look good value for money too on a price-to-earnings (P/E) ratio of just 5 as well.

I’d buy Real Estate Investor shares, adding this REIT to my existing collection. I believe they will help boost my passive income stream and provide stable returns over the long term.

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As such, here are three top penny stocks I would buy now, considering their growth potential and current valuations. 

Top penny stocks

One of my favourite sectors to hunt for bargains at the moment is real estate. Commercial property prices were hit hard by the pandemic, but they have been recovering steadily. In many cases, the share prices of companies with exposure to the sector have been slow to catch up. I think this presents an opportunity.

Real Estate Investors (LSE: RLE) owns a commercial property portfolio in the north of England. The stock is currently trading at a price-to-book (P/B) value of just 0.7, and it also supports a dividend yield of 8.6%. 

Even though these metrics look attractive, I need to consider the risks the company is facing. These include higher interest rates and potential economic contraction due to the cost of living crisis. 

Despite these headwinds, I think the company looks incredibly attractive and undervalued, considering the recovery in the commercial property market. 

Growth opportunity

The short-term lending market has faced a lot of criticism in recent years, and for good reason. Unscrupulous lenders have been ripping off borrowers. And as regulators have clamped down, many have collapsed. 

Morses Club (LSE: MCL) is one of the few survivors. I think the corporation now has an opportunity to capture market share where other businesses have been forced out of the market. That said, the prospect of additional regulations is probably the most considerable risk facing the group today. 

Nevertheless, I think its low valuation more than makes up for this risk. The stock is trading at a forward 2023 price-to-earnings (P/E) multiple of 5. This makes the firm one of the cheapest penny stocks on the market.

Analysts also believe the company has the potential to yield 12% next year as it returns to growth. Considering these metrics, I believe the opportunity here far outweighs the risks of investing. 

One of the best income stocks to buy now

Duke Royalty (LSE: DUKE) has an interesting business model. The company provides financing to its clients and receives interest in the form of royalties. It reinvests some of this money and returns a percentage to investors. 

Unfortunately, the firm has had to lean heavily on shareholders to drive growth in recent years. It has dramatically increased the number of shares outstanding as it uses investors’ cash to expand the business. Further equity issuance could hit returns in the future. 

Still, I think Duke Royalty has potential as an income and growth investment. That is why I would add the company to my portfolio of penny stocks. At the time of writing, the stock supports a dividend yield of 5.8%, which could hit 7.2% next year, according to City analysts. 

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In contrast, FTSE 250-listed Saga (LSE: SAGA) offers a dividend yield of over 8%. This suggests it could generate high returns, with a margin of safety appearing to be on offer. After a disappointing share price performance, the travel and finance company targeting the over-50s could deliver a sound recovery, alongside a smaller dividend stock which released some positive news on Monday.

Improving performance

The company in question is Real Estate Investors (LSE: RLE). The Birmingham-focused real estate investment trust (REIT) is seeing an increase in tenant demand across its portfolio. Its number of tenants increased by 4.3% to 269 in 2018, while its occupancy level of 96.1% is 2.2 percentage points higher than in the previous year, representing a record level for the company.

The business intends to continue to focus on existing opportunities within its portfolio. It recently acquired a mixed-use scheme called The Quadrant in Redditch for £3m, which represents a net initial yield of 12.2%. Although it’s aware of potential economic challenges, it continues to seek expansion opportunities.

With a dividend yield of 7.7%, Real Estate investors could have income investing potential. Clearly, it’s a relatively small business which operates in a narrow geographical area. However, with a price-to-book (P/B) ratio of 0.8, it could offer a wide margin of safety.

Recovery potential

Also trading at a relatively low valuation is Saga. As mentioned, it’s experienced a disappointing share price performance in recent months, following the FTSE 250 lower while being hurt by difficult operating conditions. They have caused its financial outlook to remain somewhat challenged, with profit growth expected to be minimal over the next couple of years.

From an income investing perspective, though, the stock could have significant appeal. Its dividend yield stands at 8.6%, which is 3.7 times the current rate of inflation. Dividend payouts are expected to be covered 1.5 times by profit in the current year, which suggests that they are affordable and could even rise over the medium term.

In terms of Saga’s valuation, its price-to-earnings (P/E) ratio of 7.9 suggests that it offers a margin of safety. Its bottom line is forecast to return to growth in the next financial year, while a refocused strategy could help to enhance its financial returns. At a time when a number of FTSE 350 shares yield over 5%, the stock could offer a mix of dividend appeal, value-investing potential and recovery prospects over the long run.

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Of course, some of the FTSE 100’s incumbents offer higher yields than the index. National Grid (LSE: NG), for example, has a dividend yield of 6%. This could mean that it’s able to offer stronger total returns than the index over the long run. Alongside a 6.6%-yielding stock that reported positive news on Monday, it could be worth buying for investors who are looking to generate high income returns.

Improving prospects

That company in question is Real Estate Investors (LSE: RLE). The Midlands-focused property group released first half results which suggest it continues to benefit from strong operating conditions. Its revenue increased by 4.2% to £7.4m, while underlying profit before tax moved 9.7% higher to £3.4m. Its gross property assets increased by 2.2% to £217.8m, while acquisitions of £7.6m were undertaken during the period. They have the potential to boost its financial performance yet further, having been purchased at a net initial yield of 7.66%.

Although the company has experienced positive trading conditions during the period, it’s nevertheless planning for a challenging year. Given the increasing political uncertainty in the UK, this seems to be a shrewd move. As such, strategic sales, securing £30m of cash and agreed bank facilities, could help the business to capitalise on any downturn in the property market. With Real Estate Investors having a dividend yield of 6.6% at the present time, its total return potential seems to be high over the long term.

Solid performance

The income prospects of National Grid also seem to be relatively impressive. The company is aiming to raise dividends per share by at least as much as inflation over the medium term. Given the potential for the pound to weaken in the coming months as Brexit becomes a reality, this could be a policy from which investors benefit over the medium term. And with dividends being covered 1.2 times, they seem to be highly affordable.

Of course, the company faces regulatory and political risk. As with a number of utility stocks, the threat of more onerous regulations and nationalisation looks set to remain a feature of their outlooks over the next few years. But with such a high yield and a price-to-earnings (P/E) ratio of around 15, it seems as though investors have priced in the risks facing the business.

As such, from a risk/reward perspective, National Grid appears to be worth buying for the long term. The FTSE 100 may offer a relatively high dividend yield, but with the utility company’s income return being 200 basis points higher, it could deliver stronger returns in the long term.

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However, today may eventually be viewed as a stunning opportunity to buy property stocks for future years. Valuations are low, financial performance remains robust and this could mean the risk/reward ratios on offer are compelling. With that in mind, here are two property stocks that could be worth buying right now.

Improving performance

Reporting on Tuesday was Real Estate Investors (LSE: RLE). It is a real estate investment trust (REIT) which is focused on the West Midlands commercial property market. Its pre-tax profit for the 2017 financial year increased by 37.8%, with a record underlying profit before tax of £6.2m. Its property assets grew in value to £213.1m, which is a gain of 5.5%. This has allowed the company to increase dividends for the fifth year in a row, with them up by 19% during the year.

Looking ahead, the uncertainty present in the property market provides the company with the opportunity to buy discounted assets. It has also been able to make strategic sales and remains confident in its long-term outlook.

With Real Estate Investors trading on a price-to-book (P/B) ratio of 0.7, it seems to offer excellent value for money. While relatively small and lacking in regional diversification, the stock has a wide margin of safety. This suggests that even if the wider economy experiences a downturn, its valuation may have already factored-in more difficult trading conditions. As such, it could be worth buying at the present time.

Solid performance

Also offering investment potential within the REIT sector is Land Securities (LSE: LAND). As one of the largest operators in the sector, it offers a considerable degree of diversity and a strong balance sheet. This could help it to perform relatively well in what may prove to be a challenging era for the economy.

In previous years, the company has been able to generate solid performance. Its earnings have risen in each of the last four years and are due to do likewise in the next two. This could help to boost the company’s income prospects, with it expected to yield almost 5% in the next financial year.

With an envious portfolio of assets and a strategy which seems to be working well, Land Securities could prove to be a strong buy for the long term. As with many of its sector peers, it could offer a volatile share price in the short run. But with a P/B ratio of just 0.6, it appears to be in ‘bargain territory’ and could be worth buying now for the long run.

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However, with inflation already standing at 3% and forecast to move higher, a 4% dividend yield may not remain a real-terms income return in the medium term. Therefore, buying these two investment trusts with higher dividend yields than the FTSE 100 could be a shrewd move.

Positive outlook

Reporting on Monday was Midlands-focused property Group Real Estate investors (LSE: RLE). The REIT announced the sale of 24 Bennetts Hill in Birmingham for a cash consideration of £4m. This is a premium to book value and represents a 5.9% net initial yield. It also means the business has almost doubled its money versus the £2.06m it paid for it in December 2014.

In addition, Real Estate Investors has also completed the letting of Peat House in Leicester. The building is fully occupied and produces a rental income in excess of £0.5m per year. This has contributed to a record occupancy across the company’s portfolio of 95%, which suggests that it could enjoy continued strong momentum in future.

With a dividend yield of 5.1%, the company looks set to offer a real income return in the long run. Furthermore, its bottom line is expected to increase by 14% next year and this is due to prompt a rise in dividends of around 7%. This means that not only does it have an above-inflation dividend yield, its shareholder payouts could rise at a much higher rate than inflation in future years. As such, now could be the perfect time to buy a slice of the business.

Upbeat outlook

Also offering an impressive outlook is fellow REIT Hansteen (LSE: HSTN). The company’s asset base appears to be strong after several changes have been made, with its profitability due to rise by around 20% next year. This suggests that the performance of its end markets could continue to be strong, albeit with some uncertainty being present.

A double-digit rise in earnings is expected to prompt a rise in dividends of 6.3% in the 2018 financial year. This puts the company on a forward dividend yield of 4.7%. Beyond next year, there could be scope for a further rise, as the company appears to have a sound strategy which is benefitting from continued strong demand for rental space.

As well as this, Hansteen could deliver a rising share price. Its dividend yield suggests that it may offer good value for money, while a price-to-earnings growth (PEG) ratio of just 0.9 may do likewise. Therefore, although the UK economy may face an uncertain future due in part to Brexit and the potential challenges it may bring, now could be the right time to buy a REIT such as Hansteen for the long term.

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While an interest rate rise may be on the cards in the near term, it may be insufficient to significantly reduce the rate of inflation over the medium term. With that in mind, these two investment trusts could be worth buying right now.

Improving performance

Reporting on Monday was real estate investment trust (REIT), Real Estate Investors (LSE: RLE). The company is focused on commercial property in Birmingham, and it has enjoyed strong performance in the first half of its financial year. For example, its net asset value (NAV) per share increased by 2.1% and its revenue increased by 19.9%. This was despite continued market and political uncertainty, with the company’s robust strategy and resilient investment market helping it to perform relatively well.

Real Estate Investors was able to increase dividends per share by 20% in the first half of the year. This puts it on a dividend yield of 5.1%, which is 2.2% higher than the current rate of inflation. The prospects for dividend growth appear to be encouraging. A rising dividend remains a central part of the company’s strategy following five years of year-on-year growth. And with the West Midlands economy remaining vibrant and benefitting from weaker sterling, the performance of the business could remain strong.

Certainly, there are clear risks to the wider UK economy from Brexit. Uncertainty could cause reduced spending by businesses and consumers alike. However, with a price-to-book (P/B) ratio of just 0.9, the company appears to offer a wide margin of safety for the long term.

Income potential

Also offering strong income prospects is The City of London Investment Trust (LSE: CTY). It has a dividend yield of 4.1% at the present time and a number of its major holdings have significant dividend growth potential over the medium term. For example, Lloyds is due to increase its payout ratio in the next couple of years, while Shell‘s free cash flow is expected to increase due in part to its acquisition of BG.

As well as dividend growth potential, the company has a diverse range of holdings which should minimise risk. For example, over 11% of its holdings are in non-UK equities. This could provide some geographical diversification, while an overall focus on the UK may allow it to continue to benefit from weaker sterling to at least some extent in future.

While it trades at a premium of 1% to its NAV, The City of London Investment Trust has a strong track record of growth. It has recorded a return of 24.6% over the last three years, which is almost 2% higher than its UK Equity Income benchmark. As such, it appears to be a shrewd buy for the long run.

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Strong performance

Reporting on Wednesday was shopping centre operator Intu (LSE: INTU). The company stated that the active tenant demand of last year has continued into the current year. Since the start of the year it has been able to sign 42 long-term leases representing £6m of annual rent. This is 5% above the previous passing rent.

The company has also made progress with its development pipeline, with 90% of the space in the Intu Lakeside extension either exchanged or in solicitors’ hands. Although the company acknowledges that the outlook is challenging due to Brexit, it nevertheless is focused on delivering continued growth in like-for-like net rental income. Alongside its operations in Spain, it appears to have a bright long-term future.

With Intu currently yielding 5%, it seems to be a relatively attractive income stock. While dividends are covered only 1.1 times by profit, the nature of the company’s business means it can afford to pay out almost all of its earnings to shareholders in the form of a dividend.

The company’s price-to-book (P/B) ratio of 0.75 suggests that it offers a wide margin of safety. This means that even with the uncertainty caused by Brexit, its shares could offer significant upside potential. As such, their risk/reward ratio seems to be highly attractive.

High reward potential

While Intu has Spanish operations and locations which are well-diversified across the UK, Real Estate Investors (LSE: RLE) offers a much more localised business model. It is focused on Birmingham and the West Midlands, which means it is likely to have a higher risk profile than its property sector peer.

Despite this, Real Estate Investors could prove to be a sound long-term buy. It currently offers a dividend yield of 4.9%, which could rise in future. The reason for this is an excellent track record of growth in the level of shareholder payouts. In 2012, the company paid a dividend of just 0.5p per share, while that has now risen to 3p per share in the current year.

While a six-fold rise may not be achievable in future due to a dividend coverage ratio of 1.2, investors in the company look set to experience an inflation-beating increase in future dividends.

As well as generous income returns, Real Estate Investors also has capital growth potential. Its shares trade on a P/B ratio of only 0.9, which indicates that they offer a wide margin of safety. With earnings growth of 22% forecast for 2017, now could be the perfect time to buy a slice of the business.

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Also, if you’re prepared to be greedy when others are fearful, you can buy REIT units at a significant discount to the value of the underlying property, which is probably one of the greatest advantages of investing in property via a REIT. 

Two of the property companies I’ve selected for my portfolio are U and I Group (LSE: UAI) and Real Estate Investors (LSE: RLE). 

Property development income 

U and I Group is a property regeneration company, which means it’s more speculative than a REIT but the returns on offer are higher. The company is primarily a property developer that buys, develops and sells on buildings generating an impressive return for investors along the way. Management is targeting £50m in property development gains per annum until 2019, with a 12% annual post-tax return for investors targeted through a combination of net asset value growth and dividends. 

In addition to the firm’s property development arm, management has acquired a number of properties to lease providing a steady rental income for the group. 

At the end of August U and I’s net asset value per share was calculated at 272p meaning that at today’s price of 160p, the shares are trading at a 42% discount to NAV. City analysts are forecasting a dividend yield of 4.8% this year and 7.7% for 2017 as the company pays out development profits. In the past 30 days, management has acquired around 40,000 shares in the company to take advantage of the depressed share price. 

Commercial REIT

Real Estate Investors is a commercial property REIT focused on the North of England. The company’s CEO owns a significant chunk of the group’s outstanding shares, and so you can be sure he’s looking to achieve the best returns for investors. 

Over the past few years, Real Estate has been expanding its property portfolio, buying assets with high-quality existing tenants in place that offer a double-digit yield. For the first half, the company reported a 58% increase in gross property rental income, 24% increase in gross property assets and management hiked the first quarter dividend distribution by 25%. 

At the end of June, the group’s NAV was 63p. Once again, just like U and I, shares in Real Estate are trading at a double-digit discount to net asset value after recent declines. Also, Real Estate’s management has been increasing their shareholdings in the company recently. A dividend of 2.5p per share is predicted for 2016, a yield of 4.4% at current prices. 

Foolish summary 

All in all then, I believe that Real Estate and U and I are some of the best stocks to play the UK property market. Both companies are trading at a deep discount to net asset values, support an above average dividend yield and management owns a large chunk of the shares. 

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