Why now is the perfect time to unlock passive income from UK real estate

For investors seeking passive income opportunities, few sectors are offering the stellar bargains currently in British real estate. Right now, almost every real estate investment trust on the London Stock Exchange is trading at a discount. And opportunistic investors have started to take notice.

In the last couple of months, we’ve seen massive takeover deals being signed and rejected within this space. That includes Care REIT, which agreed to a £450m takeover, Urban Logistics REIT, which has accepted a £674m deal, and Assura at a whopping £1.6bn buyout.

But not everyone is giving in to tempting takeover bids. Warehouse REIT (LSE:WHR) is one such business that rejected the recent attempt to take over its operations. This move sent its shares flying. Yet despite sitting close to its 52-week high, the shares are still trading at a 15% discount to net asset value, paying a tasty 5.9% dividend yield.

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What’s behind the discounts

Since REITs have to pay the vast majority of their net rental income out as dividends, most are reliant on debt financing to expand their real estate portfolios. That was fine in the pre-pandemic days. But in 2025, with interest rates still elevated, debt is now far more expensive. And a lot of firms are struggling to cope.

Pairing this with lower property prices, if businesses can’t keep up with debt servicing costs, they might be forced to start gutting their real estate portfolios. In other words, the discounted valuations are a reflection of the risk of investing in debt-heavy businesses right now.

However, investors haven’t really been differentiating between the weak REITs and the strong. Given Warehouse REIT’s firm rejection of the recent takeover attempt, it seems this stock, along with several others, belongs in the second category.

High-yielding opportunity

At a near 6% yield, the passive income offered by Warehouse REIT in 2025 firmly beats the FTSE 100‘s 3.5%. And with the Bank of England steadily cutting interest rates, the group’s financial performance has been slowly improving.

In its last trading update, management confirmed another 25 new, renewed, or renegotiated leases with tenants totalling just shy of £3.5m in annualised contracted rent. That brings the total across the nine months leading to December 2024 to 71 customer transactions and £9m of annual rent – up 22.1% versus previous tenancy agreements.

Needless to say, higher income is great news for income investors since that means there’s more money to support the dividend. But it’s important to highlight that the firm, like many other REITs has a significant pile of debt to deal with.

As of September 2024, there’s about £294m of loans & equivalents on its balance sheet, incurring around £22m in annual interest expenses. And it was this debt burden that caused institutional investors to downgrade the stock in 2024, on fears that management wouldn’t be able to keep up with both interest and dividends.

Despite these fears, the firm continues to pay both. To be fair, some sacrifices had to be made in its property portfolio. But the end result is its debts being refinanced and hedged to a more manageable position. And with property prices now back on the rise and interest rates falling, this strong position is set to improve throughout 2025 and beyond. That’s why I’ve already added Warehouse REIT shares to my passive income portfolio.

The post Why now is the perfect time to unlock passive income from UK real estate appeared first on The Motley Fool UK.

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Zaven Boyrazian has positions in Warehouse REIT Plc. The Motley Fool UK has recommended Warehouse REIT Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.