I think that real estate investment trusts — or REITs — are a great way to make a long-term passive income.
I like property stocks because they can raise rents to offset the impact of soaring inflation. This can give them added strength to pay dividends in tough times like these.
And I like REITs in particular for rich income streams. This is because they have to pay 90% of annual profits out by way of dividends.
Here are two top REITs I think will deliver a healthy second income for many years.
Safe as houses
The PRS REIT (LSE: PRSR) invests in residential rental accommodation. More specifically, it’s dedicated to providing family homes across the UK. This is a part of the market where rent growth is particularly strong.
There simply aren’t enough rental homes to go around. It’s why landlord services provider HomeLet reports that the average rent for all properties soared to new record highs of £1,143 per month in August.
This was up 1.4% from the previous month and a staggering 8.5% from August last year.
The PRS REIT latest financials illustrated this acceleration in rental income. Like-for-like rents on stabilised sites were up 5.1% in the 12 months to June, it said. Rents rose by a more modest 4.8% in the year to March.
It’s my belief that the market’s supply-and-demand imbalance will get worse before it gets better. And so rents should keep shooting higher. Housebuilding activity in the UK remains weak. Meanwhile, the exodus of buy-to-let investors is increasing as landlord costs stomp higher.
An ultra-competitive mortgage industry is a threat to this REIT. This, along with government support for first-time buyers, is helping people to leave the rental sector. But all things considered, I think the trading landscape remains highly favourable.
The PRS REIT carries a 4.1% dividend yield for the current financial year (to June 2023).
Another top-class REIT
A strong housing market bodes well for self-storage companies like Safestore Holdings (LSE: SAFE). Movers can need extra storage for several reasons, from needing to de-clutter before switching houses to keeping things in boxes whilst they decorate.
According to Cushman and Wakefield, average rental rates have risen 9% over the past year. They now sit at record highs of £29.13 per square foot.
Like the PRS REIT, Safestore is operating in a market where supply is failing to keep up with demand. That real estate report showed that 2,050 self-storage facilities are in existence today, up just 2.65% year on year.
This is why Safestore’s latest financials showed revenues and underlying earnings up 14.6% and 19.9% respectively between November and April.
Now Safestore doesn’t have the biggest dividend yield out there. This sits at 2.7% for the financial year to October 2022.
However, I think this REIT is a great bet for those seeking spectacular income growth. The annual payout here has leapt 115% during the past six years. I’d buy the business even though falling consumer confidence poses a near-term risk.