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Recently, owning real estate investment trusts (REITs) has largely been a challenging experience for investors.
The sector has kept delivering for those individuals chasing a second income, broadly speaking. This reflects partly REIT rules requiring the lion’s share (90%) of annual rental profits to be distributed to shareholders.
However, the share prices of these property stocks have weakened following recent central bank actions. Higher interest rates in 2023 and 2024 hammered these companies’ net asset values (NAVs) and raised their borrowing costs.
Time to invest?
Yet, with interest rates falling, now could be a good time to consider buying shares in these dividend-focused investment trusts. Here are three to consider for a long-term passive income.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Top marks
Unite Group (LSE:UTG) is a leading player in the purpose-built student accommodation (PBSA) segment. Not only is this a defensive part of the property market. It’s one where rents are booming as tenant numbers rapidly rise.
Like-for-like income here jumped 7% in the six months to June, latest financials showed. This reflected both robust occupancy and rental growth.
Earnings are naturally sensitive to university enrolment levels in the towns where Unite operates. However, its wide geographic footprint helps reduce this threat (it currently operates in 23 UK cities).
Furthermore, the FTSE 100 stock’s planned £723m takeover of Empiric Student Property will (if successful) further diversify its portfolio and boost its earnings prospects, too.
Safety first
Self-storage trusts like Safestore (LSE:SAFE) have enormous growth potential, driven by trends like:
- A growing urban population, resulting in smaller living spaces
- Individuals moving home more frequently
- A rising culture of ‘hoarding,’ where people accumulate possessions
- People decluttering and relocate items from the home
- The growth of online shopping, raising storage demand from e-retailers
Safestore is one of two REITs operating in this area. I like this particular one because its 200 stores span the UK, Spain, France, The Netherlands, and Belgium, meaning it carries less geographic risk than companies operating in one country.
While the long-term picture is bright, be mindful that rental growth and occupancy rates can disappoint during economic slowdowns.
Home comforts
Rents on residential properties have slowed considerably of late. But a steady exodus of buy-to-let investors means the outlook for companies like the PRS REIT (LSE:PRSR) remains encouraging.
This trust holds a portfolio of roughly 5,500 homes. It’s also focused on the family homes segment where shortages are especially acute. Consequently, like-for-like rents on stabilised sites rose 9.6% over the 12 months to June, greater than the broader rentals market.
According to the Royal Institution of Chartered Surveyors (RICS), the number of new properties entering the market last month fell at its sharpest pace since the Covid-19 pandemic. This is a positive omen for PRS REIT over the short term and beyond.
A potential change in rental regulations might dampen the trust’s future returns. But so far, conditions in this highly stable sector remain favourable.
