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I see the long-term appeal of real estate investments. However, I am not too fond of the practicalities of buying, owning and renting a property.
Instead, I would buy shares in some of the UK’s REITs listed on the London Stock Exchange. And that’s because they have the potential to provide me with passive income for decades.
REITs are companies that buy, own and manage properties. And they distribute at least 90% of their land revenue to shareholders every year. But it’s even better than that.
Real estate companies that meet the conditions required to be a RREC are exempt from corporation tax. And that means shareholders can get even more returns from the underlying real estate investments.
An attractive valuation
There are many to choose from. But I like the look of Real estate investors (LSE: RLE). The company has a market capitalization of around £63m with a share price close to 34.25p. And it invests in commercial property assets in central Birmingham and the Midlands.
The valuation seems attractive to me. The price-to-book ratio is close to 0.6. And the forward-looking return for 2022 is around 9.5%. On top of that, City analysts expect shareholder income to grow by around 5% in 2023.
In July, the first half business update revealed details on the progress of asset sales. The company sold some of its properties at bargain prices. And he used the proceeds to pay off some of his debt.
In the first half of 2022, the sale of 11 assets raised £5.7 million. And directors said realized prices represented an overall increase of nearly 30% from December 2021 valuations. ‘assets. And he is in the process of selling another £10 million worth of properties.
However, real estate investors made no acquisitions in the first six months of 2022. And administrators said that was because of a “lack of properly valued assets”. I’m encouraged by the way the company seems to be managing its portfolio with a keen eye on values.
Better returns for future shareholders?
The directors believe that the share price discount to the net tangible assets figure is “unjustified”. And they are determined to do everything possible to reduce the discount. And part of that is the “opportunistic” sales program.
For the future, they said If the “important” discount persists, they will consider other measures. For example, a special dividend, share buybacks or some other form of return of capital to shareholders.
The directors also said they recognize the need for market consolidation within the real estate and REIT market. And they are “Alert to options that align with shareholder interests”. I take that comment to mean that they may consider buying other companies or even selling real estate investors at a higher price.
There can be no guarantees. But I think the company is well positioned to offer me meaningful returns in the years to come. Although it is always possible that an economic downturn or a housing market crash could derail the company’s plans. Nevertheless, I am keen to buy some of the stocks now.