ASX real estate investment trusts (REITs) may be an underrated place to find businesses offering compelling levels of passive income.
Commercial property can deliver both rising real estate prices and solid rental income. I like investing in REITs that can provide rental profit growth because that's an important driver of total shareholder returns (TSR).
I'm attracted to the following ASX REITs because of their strong distribution yields and potential inflation protection.
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Rural Funds Group (ASX: RFF)
Rural Funds owns a portfolio of farmland across Australia which includes cattle, almonds, macadamias, vineyards and cropping.
The business has deliberately built its portfolio to be focused on farms that offer growth and where Rural Funds can invest to boost the productivity (such as increased water access).
The business also owns a significant amount of water entitlements that can be leased to farmers.
It offers inflation protection because a significant portion of its rental contracts have rental income linked to inflation. While higher interest rates are a (shorter-term) headwind, it can lead to permanently higher rental income. Most of the rest of its rental contracts have fixed annual increases, along with market reviews.
It currently expects to pay a distribution yield of 5.7% in FY26, which I'd say is a solid starting point.
Charter Hall Long WALE REIT (ASX: CLW)
The other ASX REIT I'll point out is this one which owns a diversified portfolio of properties which aim to give investors rental income on long contracts.
The REIT has a weighted average lease expiry (WALE) of around nine years. That's a lot of rental income that has already been locked in!
I like that it's diversified across hotels, distribution and logistics centres, telecommunication exchanges, data centres, Bunnings properties, government-tenanted buildings and so on.
By owning a wide array of assets it reduces the risk of being too exposed and means it can invest in almost any property sector for the best opportunities.
The business can provide inflation protection because roughly half of the properties have rental income that's linked to inflation, while the rest have fixed annual increases. This growth won't shoot the lights out with growth, but it can provide regular growth.
It's expecting to slightly increase its annual distribution in FY26 by 2% to 25.5 cents per security, translating into a distribution yield of 7%. That's a great starting point for passive income investors, with the potential for long-term growth.
The business looks better value after falling around 20% over the last six months.
