Real estate investment trusts (REITs) can be some of the most attractive dividend shares around. When things go well, they can offer investors genuine passive income from leased property.
REITs often come with high dividend yields as a result of having limited growth prospects. But with an 8% yield, Regional REIT (LSE:RGL) might offer investors the best of both worlds.
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Portfolio
One of the most important things with any business is the supply and demand equation. Whether it’s software or real estate, that’s where the ability to charge high prices comes from.
A lot of REITs – understandably – focus on sectors where demand is strong. One of the most prominent examples in recent years has been warehouses and industrial distribution facilities.
Regional REIT, by contrast, focuses on the other side of the equation. Offices – specifically, high-quality ‘Grade A’ offices – have been out of fashion recently, but this means supply is weak.
Office construction in the UK is at a 10-year low, meaning a favourable equation for the owners of the best assets. And Regional REIT owns a portfolio of offices located outside the M25.
Growth
Regional REIT’s current occupancy level is just under 80%, which is low compared to other REITs. But that gives the firm clear scope for future growth.
One reason for the low occupancy level is some of its properties are older and less attractive to tenants. But the firm is currently pursuing a strategy of disposing of some and investing in others.
In general, growth is a challenge for REITs. Being required to distribute the cash they generate to investors means expansion has to be financed through debt or equity.
Regional REIT’s Capex to Core initiative therefore might give it some unusual growth prospects. And combined with an 8% dividend yield, this could be an attractive proposition for investors.
Risks
One thing to note about Regional REIT is that the firm has had some tenants exercise breaks in their leases recently. That’s likely to cause rental income to be lower in 2025.
In general, this has been the result of companies either moving to larger premises or relocating. So, while it’s not ideal, it’s part of the normal course of business that investors need to be prepared for.
There isn’t much to do about this, but investors should make sure they’re getting a good enough return to justify the inherent risk. And a key part of this is the dividend.
According to the latest results, the 5p per share interim dividend is covered by its income. So the firm should be able to maintain its investor returns while it looks to re-lease its vacated buildings.
Passive income
I think investors looking for passive income should be looking at REITs. But sometimes the best opportunities aren’t in the most obvious places.
The office sector is a good example. But a shortage of Grade A properties and a lack of new buildings make it an interesting opportunity that investors might be overlooking.
At today’s prices, £1,000 buys 823 shares in Regional REIT – enough to earn £80 a year in dividends. And I think it’s a good candidate to add diversification to a passive income portfolio.
