I’ve always fancied earning passive income like a buy-to-let landlord. But I don’t reckon I’d enjoy dealing with late-night calls about dripping taps or dodgy toilet seats.
That’s where real estate investment trusts (REITs) come in. These are basically big pots filled with various property investments, managed by experts who then share the rental income and capital gains with investors.
And if that wasn’t sweet enough, the FTSE 350 Real Estate Investment Index has taken a 4.5% hit over the last year. Meanwhile, the broader FTSE 350 has jumped up 8%.
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Is this my chance to snag a deal, or is it a value trap?
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Morgan Stanley weighs in
In a research note last month, Morgan Stanley said it reckons the gloomy view on UK property stocks is overdone.
Analysts at the firm argued these stocks are a value play, thanks to healthy balance sheets and low debt levels. The investment bankers gave Hammerson – a British property development REIT with a market cap of £1.24bn – an ‘overweight’ rating.
Bart Gysens from Morgan Stanley notes that UK property stocks may have heftier price tags when you look at their net asset value compared to their European neighbours. But that hasn’t put him off; in fact, Gysens sees it as a bullish sign.
He argues that these higher prices have historically been a tip-off for better performance in the long run.
Am I buying?
I should note that not everyone’s as rosy about the whole UK REIT sector. Even Morgan Stanley has its reservations when it comes to certain stocks.
For example, the bank downgraded Land Securities to a “neutral” rating. It did so while pointing out that Land Securities’ valuation gap compared to its more highly rated peer, British Land, is the widest it’s ever been.
The lesson I take away is that it pays to be choosy. I’m certainly not bullish on all UK REITs. For example, the post-pandemic shift to remote work has made office-exposed REITs riskier.
One beaten-down UK REIT that I like is Primary Health Properties (LSE:PHP). It serves around 9% of the UK population through its portfolio of 513 healthcare facilities. I see this as a sector that is as safe as houses, with 90% of its facilities leased on inflation-indexed contracts to the government. I added this REIT to my portfolio in March 2023, and I’ll add more when I next have some spare cash.
In short, UK REITs have taken a beating over the past 12 months. But amid the rubble, I believe there are some gems for passive-income lovers and value investors alike.
