Investing in real estate investment trusts (REITs) can be a great way to generate passive income. In the UK, REITs are required to distribute 90% of their property income profits to shareholders. As a result, they often tend to be cash cows for investors.
Here, I’m going to highlight two of my favourite UK REITs. I’d be comfortable buying both of these securities for my portfolio today with the aim of generating passive income.
An under-the-radar REIT with a 4.3% yield
Let’s start with Urban Logistics (LSE: SHED). It’s an under-the-radar real estate company that owns a portfolio of strategically located warehouses across the UK. These warehouses are let out to retailers and delivery companies. Tenants include Amazon and XPO.
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The reason I like this REIT is that the market for retail warehouse space is absolutely booming right now due to the growth of online shopping. Retailers need warehouse space to store goods before they’re shipped out to consumers, and this is benefiting the companies that operate in this area, including Urban Logistics. Last year, a record 66m square feet of space was taken up in the UK, up 27% year on year.
The dividend yield here is certainly attractive. For the year ending 31 March 2022, analysts expect SHED to reward investors with a dividend of 7.6p per share. At the current share price, that equates to a prospective yield of around 4.3%. Not bad at all in today’s low-interest-rate environment.
The valuation on the stock is also attractive, in my view. At present, it has a forward-looking P/E ratio of about 19 using next year’s earnings forecast. That’s well below that of rival Tritax Big Box.
One risk to consider here is that the company sometimes needs to raise new capital to grow its portfolio. This can hit the share price in the short term. I’m comfortable with this risk, however. I think the key here is to take a long-term view and enjoy the dividend income along the way.
A FTSE 250 healthcare REIT
Another REIT I’d be happy to buy today for passive income is Primary Health Properties (LSE: PHP). It’s a FTSE 250 business that invests in healthcare properties such as GP surgeries. Its portfolio currently consists of around 520 properties across the UK and Ireland.
One reason I like this REIT is that a large chunk of its rental income is backed by the UK government. So, it’s unlikely to find itself in a situation where it’s unable to collect its rents. Another reason I’m bullish here is that the group looks set to benefit from the UK’s ageing population, which is likely to increase demand for healthcare.
PHP has a good long-term dividend track record and has increased its payout at a rate above inflation in recent years. For 2021, the group is expected to pay out 6.2p per share to investors. That translates to a prospective yield of around 4.3% at the current share price.
One risk here is the arrival of virtual healthcare services. This form of healthcare has become more popular during the pandemic due to the convenience it offers and it could potentially reduce the demand for physical GP surgeries going forward.
Overall, however, I think the risk/reward proposition here is attractive. With the stock trading on a P/E ratio of about 22 after a pullback, I see it as a buy.
