Here’s why I think Rural Funds Group is the best REIT

The residential property market looks like it’s close to tipping over, however that doesn’t mean that all property is bad.

The commercial property market is almost as diverse as the share market, you can get access to some solid real estate investment trusts (REITs) on the ASX.

My favourite REIT idea is Rural Funds Group (ASX: RFF), which is the only purely-agricultural REIT on the ASX.

Here are my reasons why I like Rural Funds:

Diverse farm types

Farmland has been a useful asset for many hundreds, if not thousands, of years. There’s a very good chance that farmland will continue growing in value due to increased food demand and the price of land going up.

Rural Funds has a diverse list of farm types that it leases out: poultry, cattle, cotton, vineyards, almonds and macadamias.

Strong contracts

A key strength of Rural Funds’ potential is its excellent contracts. It has rental indexation built into all of its leases in some form.

Around 30% of leases have fixed rental indexation of 2.5% with a market review, whilst 49% of leases have rental indexation increases that are CPI or CPI-linked. Most of the other leases are CPI-linked or fixed at 2.5%.

Good tenants

Rural Funds has a solid list of tenants, with a lot of them being listed on a stock exchange in Australia or overseas. Having exchange-listed tenants gives greater security to Rural Funds and should mean more reliable income.

Two of its largest tenants are Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

Solid income

Rural Funds has grown its distribution every year since it listed, but the share price has grown even more. Sadly, this has decreased the distribution yield somewhat, but it still has a pleasing trailing yield of 4.28%.

Management have a long-term aim of increasing the distribution by 4% each year. The payout ratio in FY18 is expected to be 79%, which is quite low for a REIT, allowing for more profit to be re-invested.

Foolish takeaway

I’m pleased to be a long-term shareholder of Rural Funds and I hope to add to my holdings as long as the price is right. Investors looking to beat the market may be rewarded by waiting for a better price, but income investors could make a long-term investment at today’s price.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED and Select Harvests Limited. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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