Real estate investment trusts (or REITs for short) are a great way for me to diversify away some risk in my portfolio while earning passive income in the process. Even so, I reckon it still pays to be picky and prioritise those companies that should be able to withstand tough economic times.
Here are three top picks I’d be happy to invest in right now.
Primary Health Properties
There are few more defensive parts of the market than healthcare. That’s why my first pick comes from this sector.
Primary Health Properties (LSE: PHP) is a real estate investment trust that owns 523 sites in the UK. The majority of these are GP surgeries which it lets out on long leases.
A price-to-earnings (P/E) ratio of 22 as I type looks expensive but I think reflects just how predictable earnings should be here. No less than 90% of the rent roll is paid by government bodies. If they don’t pay up then we really are in a sticky spot.
As mentioned, REITs can be a solid option for income seekers. By law, 90% of the tax-exempt profit from a REIT must be distributed to shareholders. Here, the forecast dividend yield is an attractive 4.6%.
This is not to say there aren’t risks. The rise in virtual healthcare options, whereby patients can receive advice and support from a distance, could begin to impact demand for bricks and mortar facilities in time. It will never be a catch-all solution but it’s certainly something I need to bear in mind.
Supermarket Income REIT
Just as there will always be a need for medicines and treatment, there will always be a need for food. This is why having some exposure to the supermarket sector makes sense to me.
Now, I could just buy shares in a FTSE 100 juggernaut like Tesco or Sainsbury’s. However, we know that this is an incredibly competitive space. So, a potentially safer option is to snap up shares in Supermarket Income REIT (LSE: SUPR).
This investment trust owns and lets out sites to both of the above. However, it also leases to Asda, Morrisons, Waitrose, Aldi, and Marks & Spencer. This earnings diversification should mean it can reliably go on paying long-term, inflation-linked income (4.8% yield currently) for the foreseeable future.
Notwithstanding this, the growing popularity of getting groceries delivered is a potential issue here. A P/E of 23 is hardly a bargain either.
So, again, it makes sense to spread my money around.
Safestore
Most of us have too much stuff. Fortunately, a wonderful way for me to capitalise on our tendency to over-consume is by storing some money in, well, a self-storage company.
Safestore (LSE: SFE) is a major player in the UK market. Only last week, it announced half-year profit of £285.2m. That’s up almost 71% on the same period in 2021!
A potential downside here is that the shares aren’t cheap. A P/E of 23 could come back to bite me if markets continue drifting downwards. The dividend yield is also ‘only’ 2.7%.
That said, a recent dip in the share price could a great opportunity. While higher prices are making us mindful of what we buy (and actually use) right now, I can’t help but think this will prove temporary. A nation of minimalists, we are not.