Record low interest rates have hurt the yield on offer from the asset class of property.
It has made residential property gross yields in cities like Sydney and Melbourne drop to around the 3%. That’s before considering all of the regular costs like council rates, land taxes, repairs, water rates, insurance and rental agent commissions.
But commercial properties have the potential to deliver a solid yield and long term capital growth if you choose the right ones.
I’m unsure about the potential long term potential of shopping centres (like Vicinity Centres (ASX: VCX)) because of the growth online shopping. I’m also not sure about office buildings because of supply and changing working patterns.
But here are two real estate investment trusts (REITs) that could be good ideas:
National Storage (ASX: NSR)
National Storage is the largest self-storage provider in Australia and New Zealand with over 125 properties located across the two countries. These properties give access to more than 68,000 storage units with a total lettable area of approximately 650,000 square metres. The company has grown fast, having listed on the ASX in December 2013 as the first listed internally managed and integrated operator of self-storage centres in Australia.
It benefits from Australia’s rising population and higher property prices. It’s more economical to store stuff in a storage unit than buying or rent a whole bedroom just to put extra stuff in it. You could be paying $100,000 or more just for that extra bedroom.
If National Storage can charge the right price to maintain (or grow) its occupancy whilst steadily increasing its rental amount charged per square metre then it could be a decent option for consistent distributions.
National Storage has a distribution yield of 5.2%.
Rural Funds (ASX: RFF)
Rural Funds Group is a real estate investment trust (REIT) that owns farms and leases them to tenants. Started in 1997, Rural Funds Management now manages $1.2 billion in agricultural assets across New South Wales, Queensland, South Australia and Victoria.
The REIT owns different farms like almonds, macadamias, cattle, cotton, vineyards and poultry. It’s a good form of diversification to have the farms spread across different sectors in-case there’s a problem in one industry.
It receives rental income from its tenants like Select Harvests (ASX: SHV) and Treasury Wine Estates (ASX: TWE). That rental income is growing either with a fixed 2.5% increase per year or an increase linked to CPI inflation, there are also market reviews with some tenants.
A significant portion of Rural Funds’ underlying value is its water entitlements to support the water needs of the tenants.
Rural Funds has a FY20 distribution yield of 6.1%.
Summary
Each of these REITs offers solid yields and are slowly increasing their underlying net asset values (NAV) per share. Rural Funds seems to be trading at better value compared to its asset value and offers a higher yield, so it would be my pick.
But these two REITs aren’t the only shares that deliver consistent and growing distributions & dividends to shareholders, the reliable businesses in the free report below are also sound picks.
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Disclosure: Jaz owns shares of Rural Funds at the time of writing, but this could change at any time.
