Five income stocks for a property revival

The dividend appeal of the property sector is under a cloud from higher rates. But is the threat overdone? A City firm thinks so as it picks five stocks to cherry-pick income.

Five of the best stocks for income investors to consider in the property sector have been named after a City firm said the threat to dividends had been overplayed.

Peel Hunt’s picks are FTSE 100-listed British Land and Land Securities, alongside mid-caps LondonMetric Property (LSE:LMP), Primary Health Properties (LSE:PHP) and Sirius Real Estate Ltd (LSE:SRE).

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As all apart from LondonMetric offer dividend yields above 6%, the City broker believes investors should be attracted to the sector’s income characteristics once again.

It points out that prudent balance sheets and long-term funding profiles mean that the companies are well placed to tackle the inevitable rise in interest costs.

Peel Hunt’s analysts said: “We believe the sector’s overall ability to absorb higher interest rates is much better than one might consider, and as such any threat to dividends is overplayed.”

Those hopes pushed British Land Co (LSE:BLND) and Land Securities Group (LSE:LAND) to top the FTSE 100 risers board today, although the pair are still down 30% and 15% respectively in the past year after higher rates diminished property’s appeal and hit valuations. 

Peel Hunt has a target price of 475p for British Land and 725p on Land Securities after highlighting their 1.25x dividend cover and benefit of long duration debt profiles.

The firm said: “The potential increase in debt costs up to 2029 is amply covered by retained earnings, while we are optimistic about rental growth across both portfolios.”

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LondonMetric and Primary Health are described as sector aristocrats based on their “enviable” dividend growth records. Their increased interest costs should be more than covered by rental growth, particularly as the bulk of this is set to come from fixed and inflation-linked uplifts across both portfolios.

With yields of 5.3% and 6.4% respectively, Peel Hunt has a target price of 205p for grocery-led warehouse firm LondonMetric and 130p for GP surgeries specialist Primary Health.

Sirius Real Estate, which is valued on 11 times earnings and offers a 6.1% dividend yield, has some of the best dividend coverage in Peel Hunt’s universe at 1.5 times.

The broker said: “We are confident in the platform’s ability to continue to drive incremental income from the portfolio of German and UK business parks, with the best-in-class operating platform central to this.” The target price is 110p.

This week’s note from Peel Hunt points out that the real estate investment trust (REIT) sector paid a record £2.3 billion to investors last year in a strong recovery from the Covid-induced reductions of 2020 and 2021. This compares to the wider stock market, where 2022 payments are still about 13% lower than their 2019 equivalent.

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Some UK and European REITs outside Peel Hunt’s coverage have recently cut their dividends, but the broker sees no reason for similar widespread action. This is despite its forecast of a 50% rise in annual interest costs between 2024 and 2029.

The broker said the sector is well placed to mitigate the pressure thanks to its conservatism regarding absolute debt levels and a preference for longer-term funding.

It added: “At the sector level, annual growth in gross rents of 1.7% per annum should more than offset higher debt costs, before we consider current levels of dividend cover. With a strong alignment to high-quality space in growth subsectors, this feels undemanding.”