Befitting its goal to become the UK’s leading income-focused REIT, Redefine International (LSE: RDI) currently offers a hearty 6.2% yield to its shareholders. Certainly, part of the investment trust’s recent pivot towards maximising income returns instead of chasing returns from rising property valuations reflects a growing consensus that the UK commercial real estate market may be at or nearing a peak.
With that in mind its goal to increase gains from rental income makes sense as management can control this aspect of the business, income returns form a disproportionate portion of total real estate returns over the long term, and the plan should provide shareholders with lower but steadier returns due to long leases.
It’s less than a year into this pivot but already there are signs of success in the company’s full-year results for the year to August released this morning. Occupancy levels across its UK and German portfolio of shopping centres, office buildings and hotels remained incredibly high at 97.7% while like-for-like (LFL) rental income rose 3.7% during the period. Together with a 3% LFL rise in property valuations, this helped drive net asset value per share up by 3.5% to 41.4p, above the current share price of around 37p.
Investing in a REIT at this point in the business cycle, especially once such as Redefine with a 50% loan-to-value ratio, isn’t for the faint of heart. That said, the firm is making good progress in selling off mature properties at premium prices and transitioning to a high-yielding portfolio of assets with long leases and much greater revenue visibility.
An enviable record
A more unique high-yielding investment trust is the British Smaller Companies VCT (LSE: BSV), which makes investments in small, unlisted companies and when it disposes of its stakes, returns the bulk of the proceeds to investors via dividends. In the year to March, total dividends paid were a whopping 22p thanks to a special dividend of 16.5p but even the ordinary dividend of 5.5p represents a 7.4% yield based on today’s share price.
The company’s portfolio is quite diversified with only two companies making up more than 5% of the portfolio and its largest stakes in an aircraft lease broker, a business process outsourcer for law firms, and a maker of inflatable lifting and handling equipment for elder care. Investing in small, mostly unlisted companies means valuations can jump around from quarter to quarter, but over the long term, the company has been very successful.
At the time of the last valuation update in June, the company had returned an average of 11.5p annually to investors over the past five years, which is no mean feat. There are definitely risks involved with investing in a venture capital fund focused on small companies, but with a strong track record, more risk-hungry investors may find this one an interesting way to gain exposure to an industry often off limits to retail investors.