ASX-listed real estate investment trusts (REITs) don't usually get a lot of attention as one of the best sectors to invest in. But, amid the recent uncertainty, it could be smart to look across this sector for passive income.
REITs give investors exposure to the commercial property sector, with landlords leasing their real estate to tenants.
The advances in AI have opened up questions about business models in certain industries. But, REITs can provide investors with secure rental income that is contracted, sometimes for a large number of years.
I'd focus on businesses that seem likely to deliver organic rental growth, which is a driver of the value of the real estate and the distribution.
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Rural Funds Group (ASX: RFF)
Rural Funds is unique on the ASX – it owns a portfolio of farmland across Australia, which includes cattle, almonds, macadamias, vineyards and cropping.
I think it's a good idea for the business to spread its investments across different sectors because that means not having all of its eggs in one basket. It also gives the business a wider search zone to find the best opportunities that can provide a mixture of capital growth and passive income.
The business is expecting to pay an annual distribution per unit of 11.73 cents in FY26, translating into a forward distribution yield of 5.8%.
The ASX REIT has agreed incredibly long rental contracts with many of its tenants, resulting in a weighted average lease expiry (WALE) of 13.9 years, giving investors significant income security.
The business is benefiting from built-in rental growth, with a mix of lease indexation mechanisms and market rent reviews. It also has a development and leasing pipeline, with productivity improvements and conversion to 'higher and better use' development opportunities. I'm expecting these growth avenues to help improve the value of the farms and grow rental earnings over time.
Centuria Industrial REIT (ASX: CIP)
Another ASX REIT I'm expecting to have a good future is Centuria Industrial REIT, which is the largest domestic pure play industrial REIT. It has a portfolio of industrial assets across key metropolitan locations throughout Australia, with a quality and diverse tenant base.
Industrial assets are benefiting from tailwind demands including e-commerce growth, more demand for refrigerated space (for food and medicine), data centres and more. This is helping drive the long-term rental potential of this business.
This is helping drive the rental earnings, underlying value of the properties and the distribution.
In FY26, Centuria Industrial REIT expects its funds from operations (FFO) to grow to a range of between 18.2 cents to 18.5 cents per unit (representing growth of up to 6% year-on-year). Using the low end of that guidance, it's trading at less than 18x its projected rental earnings.
Additionally, the ASX REIT's distribution per unit is forecast to be 3% higher year over year at 16.8 cents. That works out to be a forecast distribution yield of 5.2%.
With the FY25 result in August, the REIT's fund manager Grant Nichols said:
Looking ahead, CIP is well positioned to take advantage of the positive outlook for Australian urban infill industrial real estate. Vacancy rates remain very low, while supply is very constrained – despite the strong rental growth we have seen during the past five years, market rents remain below the required economic rent for new development in virtually all markets. Coupled with the ongoing industry tailwinds, most notably population growth and increasing e-commerce adoption, the outlook for rental growth over the medium term is compelling.
