Real estate investment trusts, or REITs, have been one of the worst performing asset classes over the past year. The UK REITs index has fallen 15% over the past 52 weeks on fears of Brexit and concerns over slowing growth in rental rates.
While these fears aren't unfounded, some trusts seem massively undervalued. Yet long-term fundamentals seem broadly intact, as the lack of supply growth will likely keep property prices buoyant for some time.
17.5% annual return
One of the best performing REITs has been Tritax Big Box REIT(LSE: BBOX). In little more than two years since its IPO, it has averaged a 17.5% annual total return with dividends reinvested.
The company rents out distribution facilities, which are high-yielding properties that also benefit from low maintenance costs. Favourable dynamics, particularly rapid e-commerce growth and tight supply, mean management is targeting total shareholder returns of above 9% per annum over the medium term.
Shares in the REIT currently trade a dividend yield of 3.6%, and are at an 8% premium to its net asset value.
One reason to prefer REITs over direct property investments is the opportunity to buy at substantial discounts to their net asset values (NAV). Discounts typically occur when investors are uncertain about their future prospects, and could be seen as an indication that the underlying assets will dip in value. But the opportunity to buy at a discount when long-term fundamentals are broadly intact seems like a no-brainer to me.
Land Securities(LSE: LAND) is at an 18% discount to its net asset value, despite one of the best development pipelines in the sector. Its development programme accounts for over 15% of the value of its combined portfolio, which means there's great potential for future earnings growth.
Earnings are forecast to grow 4% and 7% in 2016 and 2017, and City analysts expect its prospective dividend yield will rise to 3% and 3.2% in 2016 and 2017, respectively.
Hammerson(LSE: HMSO), which lost 18% of its value over the past year, has been one of the worst performers. The retail-focused REIT has been heavily sold off in light of sluggish retail sales growth in the UK, but its dividend prospects remain hugely attractive.
Shares currently yield 3.7%, but City analysts believe the dividend will grow 8% this year, with a further 7% expansion forecast in 2017. This would give its shares tempting prospective dividend yields of 4.3% and 4.6% for 2016 and 2017, respectively.
Low operating costs
Intu Properties (LSE: INTU), a shopping centre REIT, trades at a massive 25% discount to its NAV. With a yield of 4.7%, it's also higher-yielding than most stocks in the sector.
The argument for investing in Intu isn't limited to its attractive valuation, but primarily based on its low operating costs. As with any business, keeping costs low is very important, and Intu has shown its ability to do this by keeping its cost ratio below 20% over the past four years. In 2015, its cost ratio excluding direct vacancy costs, was just 16%, well below many of its peers.
Hansteen Holdings(LSE: HSTN), a small-cap REIT engaged in renting industrial properties, is a great income play. It offers a generous dividend yield of 5.1%, and City analysts expect its prospective yield would rise to 5.3% this year, and 5.6% by 2017.
Its dividend is well-covered too, as Hansteen earns an average yield of 7.8% on its portfolio. Additionally, the company uses low levels of leverage, with a loan-to-value ratio of 41%.
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Jack Tang owns shares in Land Securities Group plc. The Motley Fool UK has recommended Hansteen Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.