Why now is a golden opportunity to earn passive income from UK real estate

Property prices in the UK have been falling for some time now. I think this means there’s a great opportunity for investors looking for passive income.

According to a report earlier this week, 60% of houses priced below £500,000 have been selling for less than their asking prices. But it’s not the housing market that’s catching my eye at the moment.

Warehouses

The warehouse industry has been hit hardest by the recent declines. As a result, I think there are some incredible opportunities in real estate investment trusts (REITs) in this sector.

REITs are required to distribute 90% of their rental income to shareholders. This means that they can’t use the cash they generate to fund acquisitions, making them reliant on debt. 

As a result, rising interest rates have been causing real estate prices to fall. As borrowing to fund purchases becomes more expensive, demand in the property market subsides. 

This is especially true of industrial properties, where demand was previously strong. In 2021, investors spent over £18bn purchasing warehouses in order to benefit from the rise in e-commerce.

Now that the tide has turned, REITs that own warehouses and distribution centres are finding the value of their assets falling. The bubble in industrial properties appears to have burst.

As a result, share prices have been tumbling. Over the last 12 months, shares in Segro have fallen by 35%, making it one of the worst-performing stocks in the FTSE 100.

Investment returns

I think the sell-off in UK warehouse REITs is missing an important point, though. Even with rising interest rates weighing on prices, there are good returns on offer for passive income investors.

Despite prices falling, the amount of warehouse space leased in the UK actually increased in 2022. And the rental income from industrial properties grew faster than other real estate sectors.

I’m reminded here of Warren Buffett’s advice. What matters for an investment return isn’t what happens to the price of the asset, but how much cash the business generates. 

Buffett points out that someone who owned a business privately wouldn’t get a quote on how much they could sell their business for every day. Instead, they’d look at how the business was doing.

In general, despite their share prices falling, REITs focused on warehouses are generating good returns. This makes them attractive at today’s prices. 

I particularly like Warehouse REIT as an investment opportunity in this sector. As the name suggests, its portfolio is entirely focused on industrial properties. 

Over the last 12 months, the stock is down around 35%. But the company’s most recent trading update looked reasonably strong to me.

Rental income was up 3% and adjusted EBITDA increased by 7%. Management also announced an increase to the dividend, which currently yields around 6.5%.

To me, this looks like the kind of opportunity that doesn’t come around often. The rise of e-commerce has meant that the price of industrial real estate was inflated, but I think now is the time to make a move.

I’m expecting interest rates to rise further, which creates a risk for the value of the company’s portfolio. But the outlook for this stock looks promising from a passive income perspective.