I think there are some great opportunities in FTSE 250 stocks at the moment. There are two in particular that stand out to me as stocks to buy for long-term passive income.
Both are in the real estate sector, where share prices have been falling faster than the broader market. In some cases, this seems like an overreaction to me, so I’m looking to take advantage.
Property stocks
In the real estate sector, share prices are down around 8% since the start of the year. This is significantly more than the the FTSE 100 (down 1%) and the FTSE 250 (down 2%).
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The biggest reason is the rise in interest rates, from 3.5% at the start of the year to 5.25% today. This has been weighing on the demand side of the property market by making mortgages more expensive.
Despite falling demand, supply in the property sector (measured by UK Construction PMI) has been relatively stable. As a result, prices have been falling.
This is why share prices in the property sector have been coming down. But I think the declines in some cases might be excessive, especially in two FTSE 250 stocks.
Primary Health Properties
First on my list is Primary Health Properties (LSE:PHP), which leases GP surgeries and health centres in the UK and Ireland. The stock is down 17% since the start of the year.
With 99.6% of properties occupied and 98% of scheduled rent collected, things are going well. And with 89% of its rent coming from the UK government, the risk of tenants going bankrupt seems low.
The bigger risk, in my view, is the company’s balance sheet. The business has £1.3bn in total debt and pays £40m in interest payments, which accounts for a lot of its £75m annual rental income.
Event for a real estate investment trust (REIT), that’s a lot. But with 97% of the company’s debt fixed or hedged for the next seven years, I think there’s still a way to go before any real problems emerge.
As a result, the 7% dividend looks like an attractive source of passive income. If I had a spare £1,000 to invest, I’d put £500 into Primary Health Properties to pick up an extra £35 each year.
Warehouse REIT
Another FTSE 250 REIT on my radar is Warehouse REIT (LSE:WHR). The company owns and leases industrial distribution facilities and the stock is down 22% since the beginning of January.
Around 96% of the company’s buildings are occupied and 99% of scheduled rent was collected last year. In my view, the biggest risk comes from its tenant base.
Warehouse REIT’s largest tenant is Amazon. My concern is this isn’t going to be an easy company to negotiate rent increases with, especially with a lot of warehouse space on the market.
Offsetting this risk, though, is the fact that Warehouse REIT owns properties in good locations. This provides some difficulty for tenants when it comes to switching to a different facility.
Warehouse REIT shares also come with a 7% dividend. At today’s prices, I’d be happy taking £500 and buying shares to add to my passive income.
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