Have £5,000? here’s one FTSE 100 real estate play I’d consider after recent selling

Over the past few weeks, as the FTSE 100 has plunged lower, shares in real estate investor Segro (LSE: SGRO) have been a safe port in stormy waters for investors. Year-to-date, as the FTSE 100 has fallen by 7.2% excluding dividends, Segro has added 6.3%. If we include dividends, over the past 12 months Segro has returned 16.5% for investors, compared to a loss of 2% for the FTSE 100. 

Over the past three years, Segro has smashed the performance of the FTSE 100 returning 17.5% per annum compared to the FTSE 100’s 5.4% annualised. I reckon this market-beating performance could continue as Segro continues to expand its business empire. 

Single-focus

It owns and operates modern warehouses. In total, the group owns 68m square feet of space, valued at over £8bn. Unlike other real estate investment trusts, which have recently come under pressure due to their exposure to the commercial property market, its warehouse portfolio means that it is well positioned for the e-commerce age. Demand for big-box warehouses is only increasing as retailers invest in their out-of-town infrastructure, as evidenced by the 9.5% increase in Segro’s rent roll for the nine months to the end of September. 

As well as rent roll growth, it has 891,000m square feet of space in its development portfolio. A staggering 71% of this potential floor space has already been let, and in total, management expects to be able to achieve rent of £46m per annum on new space — an estimated net rental yield of 7%. 

The one downside I see here is Segro’s valuation. At 615p per share, the stock is currently changing hands at a small 2% premium to its last reported net asset value. The dividend yield is also a less than impressive 2.8%. Still, I think it’s worth paying a premium for the shares considering Segro’s development pipeline, which should drive net asset value growth in the years ahead. And while today’s dividend yield of 2.8%, might not set pulses racing, analysts expect steady payout growth in the years ahead as new developments are commissioned. 

Rapid growth 

If you’re looking for a stock with a bit more of a yield kick, then Custodian REIT (LSE: CREI) might be for you. While Segro is seeking to invest in modern warehouses, Custodian owns a more diversified property portfolio spread across the UK. These assets are smaller than those of Segro, with an average price, according to the firm’s annual report, of less than £10m. 

Today, Custodian announced that it has completed a deal to acquire “a high street unit on The Grove in Stratford, East London.” This is a great example of the types of property Custodian is looking to buy. Spread across two floors, it has two primary tenants and generates an annual general income of £150,935 for a net initial yield of 6.78%. 

In my view, high street commercial units are a less attractive investment compared to big-box warehouses, especially considering where the world of retail is heading. However, high street assets do offer higher yields as evidenced by Custodian’s current dividend yield of 5.5%. According to my figures, like Segro, Custodian also trades at a slight premium to net asset value. 

Overall, if you’re looking for income, and are willing to take on a bit more risk by investing in commercial property, Custodian could be a great addition to your portfolio.