Features

An income story that’s built to last

Quality real estate provides income resilience.

David Brenchley

Updated 17 May 2026

Disclaimer

This is a non-independent marketing communication commissioned by Schroder Investment Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

The buildings blocks of a well-diversified and balanced portfolio have often consisted of equities and bonds, split according to one’s risk tolerance but, mostly 60/40 in favour of stocks, to the detriment of many other diversifiers.

This make-up remains the gold standard for many, but some have started to question its efficacy after bonds failed to play their customary safe-haven role through 2022’s inflationary spike.

There are certainly merits to it: it’s simple and cost-effective to both put together and to understand, yet, in our view, it missed some key asset classes that can help to add both diversification, capital growth and income generation, particularly for SIPP investors looking to draw down a natural income.

For income seekers, we certainly think that there’s a place for real estate investment trusts (REITs) within portfolios – provided the assets owned by your chosen REIT are high quality and biased towards higher-growth sectors. For example, Schroder Real Estate (SREI) has a 65% allocation to multi-let industrial estates and retail warehouses.

Not only do REITs bring tangible, real assets into your portfolio’s fold, the primary attraction for investing in property is the income produced. Today, that income eclipses the yields available in government bonds, and there is a strong case for further growth in that income over time, in contrast to fixed income investments.

In addition, while the capital gains story in real estate is less pronounced than its income, current valuation levels provide scope for a modest re-rating – something that can generally not be said for bonds.

We think that the investment case for UK REITs looks as attractive as it has for a while now. There are a few reasons for this, which we’ll detail below.

Resilient rents

I’m sure you’ll know the score when it comes to investing in property, be that commercial or residential: you buy a building, do some renovations and improvements, then rent it out in exchange for regular income for however long the lease runs.

One interesting development we’ve noticed in the commercial property market is the divergence between the valuations of the actual buildings and the rents owners have been able to charge.

The period since interest rates started climbing in 2022 has been a tough backdrop for the sector, and capital values have corrected, as one would expect. Indeed, between June 2022 and around March 2024, the MSCI UK Monthly Property Index fell c. 25%.

Yet rents remained resilient. Since June 2022, for instance, the UK All Industrial rental growth index has risen c. 24% itself. This is in stark contrast to previous periods of falling capital values such as those starting end of 1989 and mid-2007, where rents fell by c. 12% and c. 7% over the same period respectively.

To us, this suggests that the fall in capital values was heavily influenced by rising interest rates during the period. Of course, some areas of the commercial property market have their sector-specific headwinds, but the fact that rents are rising shows that there is demand for (good-quality) assets.

At the same time, construction costs continue to rise, making it ever-more expensive to build new properties and meaning the pipeline of new developments remains thin. In addition, businesses are demanding higher sustainability specifications on their properties, crimping demand for ‘brown’ buildings. Yet, there’s a clear lack of supply of high-quality, high-ESG spec space.

This positive supply-demand dynamic has helped landlords of existing properties to successfully drive through rent increases.

Income

This trend of rising rents has a direct read-across to the ability of real estate investment trusts (REITs) to provide shareholders with an income stream upon which they can rely. It’s those rents that ultimately feed through to the dividend payout, after all.

That provides REITs such as SREI, for instance, with an attractive income profile. The portfolio’s net initial yield is 6.0%, translating into a dividend yield at the current share price (as at 30/03/2026) of c. 7.3%. That’s a 235 basis-point premium to the 10-year gilt yield.

Add in SREI’s 8.3% reversionary yield, a proxy for its underlying yield potential, and a sensible dividend policy and SREI looks attractive for income seekers.

That dividend policy is to only raise the dividend when the board and management think it can be maintained over the long term, and to do so as often as possible. This has translated to growth in the quarterly dividend of 38% since 2019.

Recovery potential

Up to now, we’ve mainly dealt with the income story for REITs, as over the long term this is the largest component of total return. However, there’s also a capital growth story unfolding in the sector that can help to underpin the investment thesis.

Since September 2024, we’ve seen some green shoots in terms of a bounce in capital values, however, the MSCI UK Monthly Property Index has only risen modestly (c. 3%) since then, with recent weakness also due to the current Middle East conflict. We’ve therefore got a long way still to go to get to the level of values we saw pre-pandemic.

As we’ve noted before, real estate is one sector where active asset management is crucial: portfolio managers need to be able to ensure properties are of the highest quality to lure and retain the best possible tenants.

Ahead of the curve

SREI is a real leader in this respect. Its ‘brown to green’ investment strategy focuses its asset management on both real estate fundamentals and improving the energy credentials of its portfolio of assets. This allows it to harness the growing evidence we’re seeing of a green premium: the higher rents and stronger valuations commanded by more energy efficient properties.

We can observe that this strategy is paying off: the £1.9m refurbishment of a warehouse unit at SREI’s second largest holding, Millshaw Park Industrial Estate, located just south of Leeds city centre and close to the motorway, enhanced its sustainability credentials, taking the unit from an EPC ‘C’ rating to an ‘A’ rating. A lease was agreed, subject to completion, with Slazenger Padel Club for a 15-year term without breaks at a rent of £9 per square foot – an increase of 86% on the previous passing rent.

SREI also spent £1.5m enhancing two of the units it owns at Churchill Way West, a retail warehouse in Salisbury, with one unit improving from an EPC ‘D’ rating to an ‘A+’ rating. This was let to Lidl on a 25-year lease, with the second let to The Gym Group on a 15-year lease, both with five-yearly inflation-linked rent reviews. The combined rent is £595,000 per year, an increase of 68% compared to the previous passing rent for both units.

Not only that, but SREI has been disposing of assets, in most cases ahead of book value.

All told, SREI offers investors diversification, exposure to the more attractive sectors of real estate such as multi-let industrial and retail warehousing, a high headline yield with an attractive dividend growth profile and a laser focus on controlling costs, with a recent management fee change saving costs and with linkage to market capitalisation, further aligning management with shareholders.

Headlines will undoubtedly be fast-moving, thanks to the Middle East conflict, but we see the backdrop to the current spike in energy prices as being different from the one that followed Russia’s invasion of Ukraine.

Back then, pandemic-related supply chain bottlenecks, heightened demand from flush-with-cash households and strong labour conditions led to inflation sticking around.

Today, the outlook is cloudier, with softer labour conditions and households don’t have anywhere near as much in excess savings. While interest rates may go up slightly, we suspect the ceiling on how high they will go is much lower today.

Notwithstanding this, we see plenty of positive fundamental drivers underlying the UK commercial property market today, as judged by what had been a nascent recovery in REIT share prices. That rally looks to have been postponed, but the earnings growth potential combined with the c. 14.6% fall in SREI’s share price since the middle of January, which now equates to a c. 22.4% discount to NAV, looks to have thrown up an attractive entry point.

This report has been issued by Kepler Partners LLP (“Kepler”). Kepler is a third-party research firm and is remunerated by Schroder Unit Trusts Limited (“Schroders”) for the production and dissemination of investment research on Schroder Real Estate Investment Trust Limited (“SREIT”). On 24 March 2026, SREIT confirmed that it is a member of a consortium, along with LondonMetric Property plc, considering a possible offer for Picton Property Income Limited (“Picton”) under Rule 2.4 of the UK Takeover Code (the “Code”).