Commercial property can be a good way to generate a reliable high yield. For me, UK REITs (Real Estate Investment Trusts) are the best way to access this sector of the market and enjoy a regular income.
The UK market offers a choice of REITs, including healthcare, industrial, office and retail specialists. Here, I want to highlight three REITs with yields over 5% that I think are among the best buys today.
A top FTSE 100 REIT
A REIT is a legal structure that’s taxed differently from a company. In short, REITs get certain tax breaks so long as they return 90% of their rental profits to shareholders in the form of dividends.
One of the largest UK REITs is FTSE 100 member Landsec (LSE: LAND). This £5.6bn firm owns some of London’s most valuable office blocks, as well as a portfolio of major shopping centres, retail parks, hotels and leisure sites.
Of course, we still don’t know for sure whether office and retail demand will return to pre-pandemic levels. That’s a risk here. But, in my view, the quality and location of Landsec’s assets means they’re likely to remain popular.
On balance, I’m attracted to Landsec’s property portfolio and its forecast dividend yield of 5.1%.
A healthcare opportunity?
One sector of the market that shouldn’t be affected by working from home or internet shopping is healthcare. My choice in this area is Target Healthcare REIT (LSE: THRL), a £700m firm which owns a portfolio of long-lease UK care homes.
At the end of December, Target’s averaged unexpired lease length was 27.5 years. This should guarantee predictable rental income for many years. With Target shares offering a 6% dividend yield, this portfolio looks attractive to me.
However, it’s worth remembering that a long lease doesn’t provide any protection against tenants who suffer financial problems. Too many bankruptcies could put pressure on care home rental rates. I don’t know how likely this is, but I do believe it’s a risk.
Fortunately, the UK’s ageing population means demand for care home beds is likely to remain strong. Target estimates that the number of over 85s in the UK will double by 2040.
By focusing on purpose-built homes with wet rooms and good facilities, Target hopes to operate at the quality end of the market, attracting financially secure tenants. I think this REIT is likely to be a long-term winner in this sector.
A regional UK REIT
My final choice is Custodian REIT (LSE: CREI). This REIT is a little different from my other two picks because it owns a mixed portfolio of property in towns and cities all over the UK.
Custodian’s portfolio includes offices, shops, industrial units and warehouses. For me, this is a UK REIT that provides direct exposure to the real UK economy. The obvious risk here is that I’d expect some of Custodian’s tenants to suffer in a recession, perhaps more than at Landsec.
I’m comfortable accepting this risk, partly because Custodian REIT has a loan-to-value ratio of less than 20% — lower than average. I think this would provide some breathing room in a difficult market.
In the meantime, I think Custodian REIT’s 5.5% dividend yield looks very attractive. I’d buy this UK REIT for my portfolio at current levels.
