Top 3 REITs to consider for long-term 5.76% passive income!
Investing in real estate investment trusts (REITs) over the last few years has been a bit challenging. Higher interest rates have dragged down property prices, negatively impacting these corporate landlords. But for investors today, thatâs also potentially created a ginormous passive income opportunity!
Why? Because with valuations tumbling, not only are these stocks looking dirt cheap, theyâre also offering chunky dividend yields. With that in mind, here are three REITs investors may want to take a closer look at â two of which I already own.
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Investing in commercial real estate
The three real estate stocks Iâve got my eye on right now are:
- LondonMetric Property (LSE:LMP) â a diversified portfolio of logistics, convenience, healthcare and entertainment properties
- Safestore Holdings (LSE:SAFE) â a network of self-storage facilities scattered across the UK and expanding into Europe
- Land Securities Group (LSE:LAND) â a specialised portfolio of retail, leisure, and workplace properties
As previously mentioned, these REITs, alongside others, havenât been terrific performers of late when looking at the share price. But from a dividends perspective, cash has continued to flow into the pockets of shareholders. And looking out to 2026, that trend could accelerate.
Beyond the natural boost from further expected interest rate cuts, each business has its own set of catalysts on the horizon.
- LondonMetric has a series of lease renewals coming up, opening the door to potential rental uplifts leading to superior net rental income
- Safestore’s started seeing occupancy levels recover in the UK as demand ramps back up alongside the groupâs store expansion
- Land Securities (Landsec) is restructuring its office portfolio to urban mixed-use while ramping up investments into retail and residential
Combined, this little basket of stocks grants investors broad exposure across the commercial and residential real estate sector with a combined average yield of 5.76% – almost double the 3.2% offered by the FTSE 100.
What to watch
Investing in REITs while their valuations remain depressed could generate some phenomenal long-term returns. After all, itâs no secret that investing towards the bottom of a market or sector cycle can unlock impressive gains.
However, itâs important to recognise that while real estate is undeniably in a downcycle, itâs hard to know whether we have reached the bottom yet.
Inflation’s proven to be much stickier than expected. If it continues to be stubborn, interest rate cuts from the Bank of England could take far longer to materialise than expected. And since all three of these REITs carry significant leverage, that means earnings could continue to be pressured from debt interest expenses.
Something to watch carefully moving forward is the loan-to-value ratio. By comparing the change in outstanding debts of a REIT against its property portfolio, investors can get an early warning sign of potential unsustainability. And if these landlords are forced to sell properties at a discount to raise cash, that could actually destroy shareholder value rather than create it.
The bottom line
Out of these three REITs, LondonMetric and Safestore are my personal favourites, offering the best risk-to-reward ratio, in my opinion. Thatâs why Iâve already added them to my passive income portfolio. But Landsec also shows some promise, making all three worthy of closer inspection. And, of course, there are also other high-yield real estate opportunities to explore right now.
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More reading
- By 2026, these FTSE 100 stocks could yield above 6.3%
- 6.5% dividend yield! Should investors consider this FTSE 100 income stock?
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Zaven Boyrazian has positions in LondonMetric Property Plc and Safestore Plc. The Motley Fool UK has recommended Land Securities Group Plc, LondonMetric Property Plc, and Safestore 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.
