Investment trusts can be a great way to build a long-term income. Today I’m looking at two property-focused trusts with very different characters.
Safer than houses
The first one on my radar is Shaftesbury (LSE: SHB), a real estate investment trust that owns 14.9 acres of prime property in “the liveliest parts of London’s West End”. This is clearly a focused play on prime London office, retail, leisure and residential property.
That’s not necessarily a bad thing. This part of the UK’s capital attracts millions of free-spending tourists each year. It’s also an area where some of the UK’s wealthiest residents live and relax. In my view it’s hard to imagine property in this area experiencing a long-term loss of value.
Today’s update certainly suggests that trading conditions are strong at the moment. Management reported “continuing high footfall and robust trading” during the four months to 8 February.
Occupancy levels were said to be “high” and recently completed properties are now 52% leased or under offer.
Is the price right?
Shaftesbury shares have fallen by 10% since hitting an all-time high of 1,055p at the start of January. Buyers today can pick up the stock for 950p, a level last seen in May 2017.
The risk is that the quality and security of the trust’s assets is still largely reflected in its share price. With low debt levels, a price/book ratio of 1.1, and a dividend yield of 1.8%, future growth could slow, especially if interest rates start to rise.
Despite this, I’d rate Shaftesbury as a stock you could safely buy and forget for 20 years.
A stock with more upside?
If you’re looking for a property trust with a higher yield and a more aggressive approach to growth, then self-storage specialist Big Yellow Group (LSE: BYG) might be of more interest.
Earnings growth is currently running at around 10% per year. Although this has been helped by the acquisition of new properties, like-for-like (LFL) growth is also strong.
During the quarter ended 31 December, LFL occupancy rose to 80.1%, up from 75.5% during the same period one year earlier. Like-for-like revenue for the first nine months of the firm’s financial year rose by 6.6% to £86.2m, helped by a 1.3% increase in average quarterly rents.
The right time to buy?
Big Yellow’s success hasn’t gone unnoticed by the market. The firm’s share price has risen by 20% over the last year and the stock now trades on about 20 times forecast earnings. A price/book value of 1.4 signals that the share price isn’t completely backed by property assets either.
Despite this, cash generation has been consistently strong. This has been reflected in modest debt levels and average dividend growth of 18% per year since 2012. Shareholders are expected to receive a payout of 30.6p per share this year, giving a prospective yield of 3.7%.
A slump in demand could cause profits to collapse. But although customers aren’t required to make a long-term commitment, the average length of stay is eight months, with 47% staying for one or more years.
With more people living in shared and rented accommodation, I’d expect demand for self-storage to remain stable. I believe Big Yellow could still be worth buying at current levels.