Yield hunters fleeing supermarkets should consider REITs instead
Date: Thursday 20 Nov 2014
Real Estate Investment Trusts (REITs) have had an excellent 2014, solidly outperforming the FTSE 100 and offering a potential haven for yield hunters.
Whereas the main index is down 1.5% for the year, companies like British Land, Land Securities an Hammerson can boast returns in excess of 18%. ()
The reasons for this are solid: many of these trusts have a heavy concentration of properties in London and, as the capital booms, demand for office space goes up and rents follow.
Increased profits mean increased dividends, since these REITs are required to pay out at least 90% of their taxable income to investors.
The companies themselves are not blind to the challenges ahead, and acknowledge that they have had a good year.
The UK outlook is clouded by a general election next year, although British Land is already relatively confident that the vote will not lead to much disruption. The firm thinks that the UK property market continues to remain attractive, with inflows continuing to the asset class.
Demand is still above the long-term average, while vacancy rates remain low. Rental growth is strong and there is little sign of a significant increase in new space, keeping a floor underneath prices as a result.
The attraction of these shares remains the dividend yield. At a sector average of 2.8% the returns are promising, and with the recovery in the UK set to continue there is little chance that we will see major cutbacks to payouts.
Yield hunters fleeing from the supermarket sector would do well to consider the REIT arena instead.
At an average of around 35 times forecast earnings, the sector is not cheap.
However, when the smaller firms like Workspace and LondonMetric are excluded the valuations look better. British Land trades at 23 times earnings, while Hammerson is on 25 times earnings.
These are not cheap, but the positive outlook means that the current valuations do appear justified.
One other cause for concern appears to be receding.
The Bank of England's recent commentary seems to suggest that a rate hike is not an impending event, and has indeed been rescheduled to the final quarter of 2015, if indeed it occurs at all next year.
Even when it does come the increase in the bank rate will be small, and not enough to prompt a real shift in allocations from REITs and other dividend stocks.
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