Could leasing warehouses be a smart way to earn a second income?
Investing in property has been a popular way of earning a second income for as long as I can remember. But the buy-to-let market has become tricky.
Increased taxes, tighter regulations, and higher interest rates have made leasing houses much tougher. But industrial distribution centres might be a smart alternative.
Warehouses
The growth of e-commerce has led to a sharp increase in demand for warehouse space over the last few years. And that’s good for the owners of these buildings.
Itâs true that growing demand has been met with higher supply. And a recession might expose a recent tendency towards excessive building. But not all warehouses are the same.Â
Vacancy rates are historically low and space in prime locations â with good access to cities and motorways â is limited. So thereâs still scope for differentiation even as supply keeps increasing.
Warehouses might be trickier than houses when it comes to finding properties, tenants, and the associated legal work. But there is a way around this for investors.
REITs
Real estate investment trusts (REITs) are companies that own and lease properties to tenants. In exchange for tax benefits, they return 90% of their net income to investors as dividends.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Different REITs own different types of properties. And investing in a REIT via the stock market can be a relatively uncomplicated way of participating in the property rental business.
In the UK, REITs that own industrial distribution centres have been attracting a lot of attention lately. Urban Logistics REIT was acquired recently and Warehouse REIT looks set to go the same way.
There are, however, still some opportunities left on the open market. And at todayâs prices, these might be worth a closer look for investors wanting exposure to the sector.
A 6.75% dividend yield
LondonMetric Property (LSE:LMP) is a FTSE 100 REIT that owns a mixed portfolio of properties. This is the firm that recently acquired Urban Logistics REIT to boost its warehouse assets.
As a result of the acquisition, LondonMetric Property has a loan-to-value ratio of around 33%, which is higher than some of its rivals. And this is something investors need to pay attention to.
I think, however, that interest rates are set to fall, which should help put the company in a much stronger financial position. Thereâs also a higher dividend yield on offer for investors.
| Company | Loan-to-value ratio | Dividend yield |
|---|---|---|
| LondonMetric Property | 32.70% | 6.77% |
| Segro | 28.00% | 4.83% |
| Tritax Big Box | 30.90% | 5.77% |
A 6.77% yield matches the average annual return from the FTSE 100 over the last 20 years. So, I donât think it will take much for LondonMetric Property to be a good investment going forward.
Income opportunities
Over the last few years, itâs become increasingly difficult for individual investors to earn a second income by leasing residential properties. But I think property could still be an attractive sector.
The rise of e-commerce might have been accelerated by Covid-19, but it looks like a permanent change. And that means warehouses â especially the best ones â should be valuable assets.
This hasnât gone unnoticed by investors, who have been taking note of REITs that own industrial distribution properties. As I see it, though, there are still opportunities that are worth considering.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended LondonMetric Property Plc, Segro Plc, Tritax Big Box REIT Plc, and 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.
