The thought of taking on a hands-on buy-to-let investment leaves me cold. The outlook for buy-to-let property is murkier now than it was 20 years ago, for example. Property prices have enjoyed a good run up, and buy-to-let investors have enjoyed decent capital gains over the past two or three decades. But now property prices are banging against the lid of affordability and recent moves in property values have been down.
Then there’s the unfavourable tax regime surrounding buy-to-let property, and the sheer inconvenience of having to buy, maintain and operate a tenanted property. Hassle, hassle, hassle – no thanks! And at the end of it all, there’s no guarantee that you’ll actually make any money from buying and letting a property. With interest rates looking like they could be on the cusp of an uptrend, property prices could fall or stagnate, meaning that erosion of the buying power of your capital could wipe out any gains you manage to make from collecting rent.
A dynamic, high-return property portfolio
Instead of all that bother, I’d rather invest in the property companies listed on the London stock exchange, such as LondonMetric Property (LSE: LMP). The company aims to generate “repetitive and growing” income streams by owning properties in tune with “modern shopping habits.” And one of the biggest habits is the shift to digital retailing, which has contributed to the decline in bricks-and-mortar retailing. LondonMetric has responded by shifting from shopping centre and retail outlet ownership to the distribution centres and “long-term income assets” that currently fill the property portfolio.
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The directors claim to be “unemotional” about the properties owned by the company and periodically review each investment. If the projected forward returns don’t measure up, the property is sold and the funds reinvested into a better asset. That sounds like a robust investment strategy to me, and it should keep the firm earning the best returns even as the retail environment evolves over time.
The forecast dividend yield runs at 4.5% or so and price-to-tangible book value is around 1.13. I think the valuation is attractive for what looks like such a well-run and dynamic property firm. But I also like the look of UK Commercial Property REIT (LSE: UKCM), which owns “a diversified portfolio of high-quality income-producing UK commercial property” spread across the UK.
Big in industrials
The company has a high weighting in industrial property, which includes logistics distribution. The directors said in the recent half-year report that industrial property was the driver of outperformance in the firm’s financial returns. The strategy chimes with that of LondonMetric Property, so it seems that both firms have migrated to areas of the market that are performing the strongest.
However, UK Commercial Property also has investments in the Office sector, the Retail sector and the Leisure sector, so there is a bit more diversity in the property portfolio. The dividend yield runs close to 4.3% and the shares trade around 0.89 times tangible book value. I think that shares in both of these property companies would sit well in a stocks and shares ISA and could make a good alternative to investing in buy-to-let property.
