The property market is in a different place to where it was a year ago. The residential market feels like it’s skating on thin ice, largely due to the impact of higher mortgage rates and the cost-of-living crisis.
However, I feel the commercial market is a lot more robust and can take advantage of this from buying real estate investment trusts (REITs). Given the benefits of holding these in my Stocks & Shares ISA, here are some of my favourite picks.
Why an ISA and REITs go well together
The main advantage of using REITs for my ISA is that the income payments aren’t liable for dividend tax. The dividend allowance has been cut at the recent budget from £2k to £1k, meaning that outside of my ISA I have a smaller budget before I have to start paying tax.
REITs receive favourable treatment based on certain conditions. One of these is that an amount of the income received from the property portfolio has to be paid out to investors. Therefore, the dividend yield is a greater focus for me here than the short-term share price movements.
A commercial property example
The first REIT I like now is LondonMetric Property (LSE:LMP). The current dividend yield is 5.53%, with the share price down 38% in the past year.
Let’s address the sharp fall in the stock first. This is mostly due to the lower valuation of the properties held in the trust. I do understand this is a risk, however I’m focused on buying this for the long term. What I’m looking at more is the state of the rental income. In the half-year results through to the end of September, net rental income rose by 14.1% versus the same period last year.
I feel income should remain strong in 2023, as the portfolio is built around distribution and storage. Some of the largest clients include DHL, Eddie Stobbart and THG.
High yield for my ISA
A second REIT on my radar is Primary Health Properties (LSE:PHP). With the share price down 27% in the past year, the dividend yield has risen to 6.24%.
As the name suggests, this trust has a portfolio of healthcare facilities it rents out. The half-year results from the summer saw a 9.8% jump in adjusted earnings versus H1 2021. It also spoke of “NHS initiatives to modernise and invest in the primary care estate”. This should help to retain tenants in years to come, maintaining high occupany levels.
Again, the hit to the share price reflects the lower property valuations. This could continue in 2023 as the UK struggles in a recession.
To try and mitigate for this risk for both REITs, I’m aiming to invest in chunks over the course of the next six to 12 months. I want to invest shortly when I have free cash, but will also top up my investment over time, in case the share price keeps falling.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
