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Property prices in the UK have been falling for some time. I think this means there is a huge opportunity for investors looking for passive income.
According to a report from earlier this week, 60% of homes priced below £500,000 have been selling for less than asking price. But it’s not the real estate market that’s calling my attention right now.
warehouses
The warehouse industry has been hardest hit by the recent declines. As a result, I think there are some incredible opportunities in REITs in this sector.
REITs are required to distribute 90% of their rental income to shareholders. This means they can’t use the cash they generate to finance acquisitions, making them dependent on debt.
As a result, rising interest rates have caused property prices to fall. As loans to finance purchases become more expensive, the demand in the real estate market decreases.
This is especially true in the case of industrial properties, where demand was previously strong. In 2021, investors spent more than £18bn buying up warehouses to profit from the rise of e-commerce.
Now that the tide has turned, REITs that own warehouses and distribution centers are seeing the value of their assets fall. The industrial property bubble seems to have burst.
As a result, stock prices have been falling. In the last 12 months, the shares of secret are down 35%, making them one of the worst performing stocks in the FTSE 100.
investment returns
However, I think the sell off of UK warehouse REITs is missing an important point. Even with rising interest rates weighing on prices, there are good returns on offer for passive income investors.
Despite falling prices, the amount of leased storage space in the UK increased in 2022. And rental income from industrial properties grew faster than other real estate sectors.
This reminds me of Warren Buffett’s advice. What matters for the return on an investment is not what happens to the price of the asset, but how much cash the business generates.
Buffett points out that someone who owned a private business would not get a quote on how much their business could sell per day. Instead, they would see how the business was doing.
Overall, despite falling stock prices, warehouse-focused REITs are generating good returns. This makes them attractive at current prices.
I particularly like Warehouse REIT as an investment opportunity in this sector. As its name suggests, its portfolio is entirely focused on industrial properties.
Over the past 12 months, the stock is down around 35%. But the company’s most recent business update seemed reasonably solid to me.
Rental revenue increased 3% and adjusted EBITDA increased 7%. Management also announced an increase in the dividend, which currently yields around 6.5%.
To me, this seems like the kind of opportunity that doesn’t come along often. The rise of e-commerce has meant that the price of industrial real estate has inflated, but I think now is the time to make a move.
I expect interest rates to rise further, creating a risk to the company’s portfolio value. But the outlook for this stock looks rosy from a passive income perspective.
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