In my view, the S&P/ASX 200 Index (ASX: XJO) share Charter Hall Retail REIT (ASX: CQR) could provide a pleasing mixture of passive income and potential capital gains. At the current valuation, the business could pay a distribution yield of close to 7%.

For investors who haven't heard of this real estate investment trust (REIT), it describes itself as the leading owner of property for convenience retailers, including shopping centres and service stations.

It may not be the most exciting investment idea out there, but I think it offers defensive earnings at an uncertain time. Plus, the outlook for potential interest rate cuts could lead to a sizeable boost for both rental profits and property valuations. Combined with its large dividend yield, it could be a dark horse idea to outperform in the next 12 months.

Defensive earnings

Its locations are essential for the communities they serve, and I can't see that changing in the next five years. In my view, tenants like supermarkets and fuel retailers will want to continue to serve customers.

The business said in its FY25 first-half results that its shopping centre convenience retail portfolio occupancy remained stable at 98.7%, demonstrating good resilience for its rental income.

The ASX 200 share reported in HY25 that its like-for-like net property income (NPI) growth was 3%, with shopping centre like-for-like NPI growth of 2.5%. The business is seeing growth from specialty retailers.

With the ongoing relative strength of the Australian economy and an expected reduction of interest rates this year, things are looking positive for retail spending to remain strong.

Potential boost from interest rate cuts

REITS have been some of the hardest-hit businesses in the last three years because of a higher interest rate, which has increased the cost of debt (hurting rental profits), and it's also acting as a headwind for property prices.

But, there are now expectations that rates could be cut multiple times over the rest of 2025.

If cuts happen, I think Charter Hall Retail REIT could be a significant beneficiary as its debt would become less burdensome, and I'd expect the ASX 200 share's portfolio value to benefit from that.

Distribution yield

The business is expecting to pay an annual distribution of 24.7 cents per unit in FY25, the same as FY24.

At the current Charter Hall Retail REIT unit price, that translates into a distribution yield of 6.7%.

That's significantly better than what we can get from a term deposit. I'm expecting medium-term distribution growth from a combination of rental increases and, seemingly, rate cuts, which could improve rental profits.