Real estate investment trusts are a great way for the average investor to play the property market. REITs offer diversification, tax advantages (if held in an ISA) and a steady income stream from property without the hassle and capital requirements of actually owning physical property.
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.
