2 REITs with yields over 5.5%

The residential property market is starting to turn, with property prices across all the major cities reportedly slightly down over the last two months.

This isn’t good for investors, particularly as most residential property investors are negatively geared on the income side of things. In plain English, that means they’re losing money in the hopes of capital gains. Losing cash each month and property prices going down could be disastrous.

However, there is another way to get exposure to property without going down the road of residential property investing. Commercial property is positively geared but also benefits from the long-term growth of land value appreciation.

Here are two ASX-listed real estate investment trusts (REITs)

Arena REIT No 1 (ASX: ARF)

Arena aims to invest in properties that are in growing industries. That has equated to a property portfolio that is focused mainly in the childcare sector. The Australian population is growing and the number of babies being born is booming.

The birth boom means that there will be a knock-on effect in a few years when more children will go through the childcare centre’s doors and should allow Arena to implement good rental increases.

It also helps that the government provides financial assistance to families putting their children into childcare.

Arena is trading with a distribution yield of 5.58% assuming the quarterly payments of 3.2 cents per security were to continue.

National Storage REIT (ASX: NSR)

National Storage is the largest self-storage provider in Australia and New Zealand with over 120 centres.

House prices in Australia and New Zealand are so expensive that it could cost more than $50,000, or a lot more, to have an extra room for storage. Therefore, the value proposition of National Storage is actually quite good. There’s only so much extra storage you can create from clever solutions with IKEA accessories.

Management have effectively grown the underlying earnings and net tangible assets over the years and this could continue as more acquisitions are made.

If we assume a 4.7 cent per security distribution for the second half of the year, it’s currently trading with a distribution yield of 6.28%.

Foolish takeaway

I’m fairly negative about most of the REIT sector, with office REITs and warehouse REITs in danger of suffering re-ratings due to interest rate changes and oversupply. However, I think there are a few REITs like the above two that could generate market-beating returns with good income and slow-and-steady capital growth.

Of the two, I already own Arena shares so I’d be inclined to buy National Storage shares at the current prices. However, either REIT would be a decent buy for income.

But, some investors just love franking credits as well. REITs generally don’t pay franking credits, but our top dividend stock for FY18 does and could be a better income choice.

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Motley Fool contributor Tristan Harrison owns shares of ARENA REIT STAPLED. The Motley Fool Australia has recommended National Storage REIT. 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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