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He FTSE 250 It recently completed its quarterly review of which stocks to add or remove from the index based on changes in their market capitalizations. The reorganization saw Burberry join index after falling off FTSE 100and easyJet he barely escaped a demotion. A popular addition was the microcomputer manufacturer. Raspberry Piwhich rose to the index after going public just four months ago.
But today I'm looking at a lesser-known real estate investment trust (REIT) that joined the index last month. Its stock price skyrocketed 30% in the third quarter of 2024, so I had to find out the story.
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The PRS Reit
The PRS Reit (LSE: PRSR) is a closed-end investment trust whose objective is to build single-family homes marketed to the private rental sector (PRS). Launched in 2017, it now has the largest build-to-rent portfolio in the UK. In total, more than 5,600 homes are scheduled for completion by the end of the first quarter of 2025, with an estimated rental value of around £66.5 million once fully let.
Recent performance is impressive, with revenue up 17% year over year and profits up 106%. Additionally, it has a dividend yield of 4% and a low forward price-to-earnings (P/E) ratio of 9.5. One concern is that it has limited coverage for interest payments, so if earnings fall, it risks defaulting on debt.
Reliable employees
I'm a big fan of real estate investing, so REITs are especially attractive to me. For smaller investors who can't afford to buy entire properties, REITs can offer market exposure. The rules that apply to them are also attractive. In exchange for favorable tax benefits, REITs must return 90% of their profits to shareholders in the form of dividends.
This makes them a great addition to a passive income portfolio. One that I already have, Primary health propertiesIt has a dividend yield of 6.7% and a solid payment history. Like many REITs, it has grown in the last month as the new Labor government promises a renewed focus on housebuilding.
Real estate, real risk
The events of the 2008 financial crisis are evidence of the risks associated with the real estate market. The price chart of virtually any global asset shows a significant drop that year, but real estate stocks were hit hardest by the losses, with many losing more than 90% of their value in a 12-month period.
The accident was described as a “black swan” event, suggesting it was unique and unpredictable. Specific event or not, it highlights the fragility of the real estate market. This is a key risk when it comes to REITs. Remember, you are only required to return 90% of earnings to shareholders: neither profits nor dividends.
A favorable market
Right now, the real estate market looks favorable to me. The first interest rate cut of the year has already increased mortgage approvals and more cuts are possible. Furthermore, the new Labor government's enthusiasm for property development is encouraging.
These factors have renewed my interest in REITs, particularly small, upcoming ones. That's why I think PRS is a great opportunity and I plan to buy the stock soon.
