Five real estate investment trusts for income and inflation protection

Real estate investment trusts (Reits) are a good way to earn income from property. Here, Rupert Hargreaves picks five of the best to buy now.

builders and a warehouse
Demand for so-called big box sheds has surged as a result of shift to e-commerce
(Image credit: © David Partner/Construction Photography/Avalon/Getty Images)

One of the easiest ways to earn an income from property is to invest in real estate investment trusts (Reits).

In their simplest form, these vehicles are investment companies specialising in buying, developing, selling and holding property.

Reits are also highly tax efficient. They don’t pay tax on property rental income as long as they distribute a certain percentage to investors (more on that later). Instead, tax is levied at the investor level as property income.

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This has certain tax benefits compared to dividends. What’s more, if the Reit is held in a stocks and shares Isa, there’s no tax to pay on rental income whatsoever.

As well as their tax benefits, Reits also enable investors to access property asset classes unavailable to most individuals.

For example, I hold Great Portland Estates (LSE: GPOR) in my portfolio. This company owns a portfolio of properties in and around central London, such as the 22-storey City Tower in the City of London.

Even if I could somehow find the money to buy this sort of asset, getting hold of someone to sell to would be another challenge altogether. These unique central London assets rarely change hands and deals are often negotiated behind closed doors. Great Portfolio has the connections and the funding to do the deals I’d never be able to do myself. But I can buy the shares.

The tax treatment of Reits

The tax regime for Reits is quite complex so I’m just going to concentrate on how UK-based investors who own shares personally may be taxed (there are different rules for overseas investors and corporations that own Reits).

Reits are exempt from corporation tax on rental income and gains from property sales, and to qualify for the regime, the rental business must represent 75% of profits and assets (there must also be at least three properties in the portfolio). To maintain its tax status, 90% of property income must be distributed each year.

This is all really the responsibility of management so individual investors might not be too concerned about how a company maintains its Reit status. Where it gets interesting for investors is the taxation of income.

Income is distributed to investors via a property income distribution (PID). These are treated as profits of a UK property business and not a dividend. Therefore, investors may be able to reduce their tax liability especially now the tax-free dividend allowance has fallen to just £2,000.

However, one thing to note is that Reits can distribute normal dividends alonsidge PIDs if they decide to return cash from non-rental sources, such as development income.

Inflation-linked income from property

This rather convoluted tax regime is why it makes a lot of sense to own Reits in a Stocks and Shares ISA, rather than traditional dealing accounts.

Still, as Reits don’t have to pay corporation taxes on rental income, they can offer more in the way of income than other equities.

And in the current economic climate, these investments also have another potential advantage, inflation protection.

Property, as a “real” asset, has usually performed well in inflationary climates (although not always) and many Reits have inflation-linked rental agreements with their clients, providing a level of insulation against rising prices.

With that in mind, here are five of the highest-yielding Reits on the market today.

An alternative to buy-to-let investing

Residential Secure Income (LSE: RESI) has a simple goal, to deliver inflation-linked returns by owning affordable shared ownership and retirement rentals across the UK.

Managed by the specialist asset management group Gresham House, the firm owned 3,233 homes at the end of March generating rental income of £15.2m and an annualised net rental yield of 4.8%. Further acquisitions are planned to boost the value of the portfolio and the company was able to push through rent increases of between 5.5% and 3.8% across its portfolio this year. 97% of its income is inflation-linked.

Residential Secure exhibits all of the qualities that I think make Reits one of the best ways to invest in property assets. Not only does the business have a large and growing portfolio of inflation-linked assets, but it has also been able to build the portfolio by borrowing at rock-bottom rates. The weighted average cost of debt is 2.1% over a 23-year period.

The stock currently supports a dividend yield of 5.1% and the net asset value was 108.4p at the end of March. The inflation-linked nature of the company’s portfolio suggests it will be able to increase the payout with rising prices in the years ahead.

An income giant to with growth potential

One of the highest yields in the Reit sector comes from Landsec (LSE: LAND). Interestingly this is also the biggest Reit in the UK. The company has approximately 24m square feet of retail, leisure, workspace, and residential hubs, making it one of the best ways to play the UK property market.

Overall, 65% of the group’s portfolio is London-based, mainly offices and retail. However, after acquiring MediaCity and U+I in late 2021, the trust is planning to grow its exposure to mixed-use urban neighbourhoods materially in the coming years. Management believes the company can deploy £1bn of capital into these development opportunities, diversifying away from the group’s core markets.

As the company moves forward with its development plans, there’s scope for higher cash returns and growth potential. The stock offers a dividend yield of 5.8% today.

Making money from sheds and boxes

One of the big economic themes of the past decade has been the shift away from brick and mortar retail towards e-commerce. This has ignited a race for space among retailers fighting for market share.

Companies that can deliver the best service at the lowest cost for their customers are going to win the race.

Demand for so-called big box sheds has surged as a result. These giant facilities help retailers fulfil orders, and builders have been struggling to keep up with demand.

An essential part of this market is the last mile infrastructure. These are facilities in towns and city districts that enable retailers to sort parcels and get them to the right houses when they are offloaded from the giant HGVs that crisscross the country every night.

Urban Logistics (LSE:SHED) focuses on finding and developing these assets. Last year the company raised £358m of equity to help fund growth, and it also earned itself a place in the FTSE 250.

The group owns 113 “mid box urban logistics assets” covering 8.3m sq ft (an average of around 75k sq ft, whereas larger out of town big box units tend to exceed 100k sq ft each). It has a further £53m of developments in the pipeline and demand for these units is strong. Just 6.9% of the portfolio is vacant and the weighted average length of its leases is nearly eight years.

As it continues to grow, management also thinks the company can push inflation-link rent increases on to customers, which are already fighting over space. The stock yields 4.8% and trades at a discount to the last reported EPRA net asset value per share of 188.8p.

Expanding development pipeline will provide growth opportunities

In the big box space, my pick is Tritax Big Box REIT (LSE: BBOX). According to this company, record takeup of large logistics warehouses (42.4m sq ft in 2021) has led to record low levels of supply.

Management is capitalising on this by ploughing money into new developments. The company is starting 3m to 4m sq ft of new developments this year, with 8.8m sq ft planned in the near future. A good deal of the developments planned over the next 12 months are already contracted out, giving the firm a high level of visibility over rental growth.

The weighted average length of leases is 13 years and management is confident that due to market supply-demand fundamentals, it can push through inflation-linked rent hikes. With so much growth potential and a 3.7% yield on offer, this stock looks to be a buy.

Diversified income stream

Custodian REIT (LSE: CREI) is my fifth and final pick for this article. Custodian is one of the most diversified Reits on the market with 160 assets and 347 tenancies split across the office, retail, warehouse and industrial property sectors.

It has also been hoovering up assets where it believes it can build value for shareholders, such as the recently acquired retail warehouse in Cromer, let to Homebase with a net initial yield of 6.3%.

The portfolio is managed by Custodian Capital, which looks after £15bn of assets for clients around the world. Its size gives it access to the best deals before they hit the market and Custodian has been able to take advantage of that. The trust is targeting a dividend of no less than 5.5p per share this year, suggesting a yield of 5.5% on the current share price.

Disclosure: Rupert Hargreaves owns shares in Great Portland Estates.

Rupert Hargreaves

Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for ten years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk, among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks; he has written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.