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.
