Yahoo Finance These unpopular property stocks are excellent income investments
Investors may currently view property stocks with a degree of derision. After all, rising interest rates have prompted a tough environment that has led to declining property prices alongside weakening demand among prospective tenants.
While this situation could worsen before it improves, thanks to the existence of time lags and sticky inflation, property companies offer significant long-term income appeal.
In many cases, their share prices have fallen to levels that not only compensate investors for the recent decline in property prices but offer a wide margin of safety that more than sufficiently factors in future uncertainty.
Although a weak near-term economic outlook means dividend growth may be constrained in the short run, widespread expectations of interest rate cuts over the coming years make the prospects for growing tenant demand, rising profits and income growth relatively upbeat.
Alongside their long-term income investing potential, stocks such as Sirius Real Estate offer attractive yields today.
Shares in the owner of business parks and industrial estates in Britain and Germany yield 5.6pc, while the dividend rose by more than 11pc in the first half of the current financial year.
This was made possible by impressive financial performance: revenue increased by more than 7pc and earnings per share by more than 13pc relative to the same period of the previous year.
Encouragingly, the company’s financial position remains sound. Its weighted average cost of debt stands at just 1.4pc. And while it has a relatively modest weighted average debt expiry of 3.3 years, interest rates are widely forecast to have moved substantially lower by 2027.
In tandem with its half-year results, Sirius Real Estate announced a £147m capital raising. The proceeds will be used to fund property purchases, which is a logical long-term approach while asset prices are depressed.
That said, the company’s net tangible assets per share rose by 0.4pc during the first half of the year in spite of a challenging environment. This means that the shares trade at a price-to-book ratio of around 0.9, which suggests a wide margin of safety.
Since we added it to Questor’s Income Portfolio in November 2019, the company’s share price has risen by around 19pc. When dividends per share equating to 24pc of our purchase price are factored in, the total return stands at 43pc.
Given the continued low valuation of the company’s shares, its sound investment strategy, attractive yield and the prospect of an improving operating outlook, further positive returns lie ahead. Hold.
Questor says: hold
Ticker: SRE
Share price at close: 87.85p
Update: Urban Logistics Reit
Another of our Income Portfolio’s property holdings, Urban Logistics Reit, also released half-year results recently. The trust, which owns “last-mile” logistics properties, reported a 12pc rise in net rental income and earnings per share growth of 2pc relative to the same period of the previous year.
While net tangible assets declined by 0.5pc in the first half of the financial year, this represented a marked improvement on the 11pc slump experienced in the previous six-month period.
The company’s shares trade at a price-to-book ratio of only 0.7, so they offer a wide margin of safety that suggests high capital returns are on the long-term horizon as the economy improves.
In the meantime, the Reit has a sufficiently sound financial position to overcome a tough operating environment. Although the weighted average interest rate on its debt of 3.9pc is not particularly low, almost all of its borrowings are hedged or fixed to maturity.
And with gearing of 41pc, its balance sheet is by no means excessively leveraged.
Although Urban Logistics Reit left its interim dividend unchanged and has failed to raise the payout over the past couple of years, its yield of 6.5pc compensates investors for a temporary lack of income growth.
Indeed, the outlook for logistics assets is upbeat thanks to improving economic prospects and a lack of supply. This suggests that dividend growth is likely to resume over the medium term.
Having produced a capital loss of 11pc since its addition to our portfolio in April 2020, albeit with a positive total return thanks to dividends that amount to 20pc of our purchase price, the company’s performance has been somewhat disappointing.
However, its prospects are far brighter than those implied by its market valuation. It therefore remains a worthwhile income holding for the long run. Hold.
Questor says: hold
Ticker: SHED
Share price at close: 117.2p
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