Real estate investment trusts, or REITs, have fallen sharply in recent months, owing to fears over the potential economic repercussions of Brexit. Investors are concerned that if voters choose to leave the European Union in Thursday’s referendum, the commercial property sector would face an immediate and very severe demand shock, which could take many years to recover from.
But are these fears overblown, and is it a good time to be greedy when others are fearful? After all, bookmakers still believe the odds of Britain remaining in the EU is well over 70%. What’s more, underlying long term fundamentals are supportive too. There remains a chronic shortage of high quality space available for businesses, while the “lower for longer” outlook on interest rates should keep rental yields low and property prices buoyant.
Growing dividends
Shares in Land Securities (LSE: LAND) currently trade at an 18% discount to net asset value (NAV), despite the REIT having one of the most attractive development pipelines. With additional rental income coming in from the completion of new office and retail developments, earnings are forecast to grow 6% this year, with a further 8% pencilled in for 2017.
Since 2012, Land Securities has increased its dividend more than 20%, and I think there is more growth to come. The REIT currently yields 2.8% today, and is projected to grow its dividend by 5% in 2016. A similar amount of dividend growth should follow in the following year, giving investors a prospective dividend yield of 3.4% by the end of 2017.
Retail exposure
intu Properties (LSE: INTU), a shopping centre REIT, trades at an even steeper discount to its NAV, of 24%. But being more heavily exposed to the retail sector, intu is arguably at a lower risk from a potential Brexit. That’s because most economists don’t expect an immediate shock to consumer spending in the event of Brexit, meaning retail rents and vacancy rates should remain stable in the immediate aftermath of the EU referendum.
Shares in intu currently yield 4.7%, and city analysts are forecasting a 1% increase in its dividend this year.
Non-cyclical
Target Healthcare REIT (LSE: THRL) should keep profiting from steady growth in healthcare needs. Healthcare demand is non-cyclical, and the need for purpose-built care homes is ever-increasing, given the rapidly ageing population.
As is typical of the sector, Target Healthcare benefits from long-term full repairing and insuring leases, which include upwards-only annual rental increases. This allows the REIT to generate very predictable cash flows year after year, which enables it to pay shareholders almost all of its earnings through dividends.
Since its IPO in 2013, Target Healthcare has delivered a total return of 17%, with its shares currently yielding 5.8%.
Better yield, but higher fees
Like Target Healthcare, MedicX Fund (LSE: MXF) invests in the healthcare sector. The fund currently pays a quarterly dividend of 1.475p per share, with underlying dividend cover of 63.0%. At today’s share price of 84p, the fund currently yields 7.0%.
Although MedicX has a more attractive yield than Target Healthcare, there is a downside. MedicX charges higher management fees — its 2015 ongoing charge, which includes a 15% performance fee on total shareholder returns above 8%, was 2.83%, compared to 2.01% for Target Healthcare, according to data from the Association of Investment Companies (AIC).
Massive 7.7% yield
Finally, U and I Group (LSE: UAI) seeks to make property investments that have the potential to gemerate strong financial returns as well as long-lasting social and economic change for local communities. The REIT focuses on regenerating city centre properties and investing in higher yielding warehouse development opportunities in the British regions.
Including the 8p per share yearly special dividend, U and I Group currently yields a massive 7.7%. Its dividend is comfortably supported by an 81% payout ratio, well below the 90% level which is usually considered to be an acceptable maximum for REITs.
Trading at a 38% discount to NAV, value investors should keep an eye on this REIT.