MARKET COMMENT
An Alternative To Buy-To-Let

By Stuart Watson (TMFTiger)
April 4, 2002

Much has been made of the increased interest in buy-to-let properties over the last few years. However, few people have highlighted the point that you can invest in a high-quality, diversified property portfolio via shares or funds. Most of these companies invest in commercial property such as offices, shopping centres, warehouses and retail units. Over the long-term, the same underlying dynamics (i.e. the economy) drive the returns for these sorts of properties as for normal housing stock.

Largest UK property companies

Company                        Mkt Cap  Assets   Debt
                                   £b      £b     £b

Land Securities (LSE: LAND)       4.7     8.3    1.9
Canary Wharf (LSE: CWG)           2.8     3.9    1.2
British Land (LSE: BLND)          2.7     8.3    4.0
Liberty International (LSE: LII)  1.6     4.0    1.7
Hammerson (LSE: HMSO)             1.6     3.5    1.3
Slough  Estates (LSE: SLOU)       1.6     3.5    1.5

Just as private landlords gear up to increase their returns, so property companies do likewise. The asset and debt figures were taken at the latest results dates, so some will be more up to date than others. They show that the large property companies are more lightly geared than the typical buy-to-let investor (at least when they buy their first property, anyway). For the above companies, debt as a proportion of assets averages around 40%. The portfolios of these companies varies significantly, too. British Land and, of course, Canary Wharf, are concentrated in the City of London, whilst Hammerson and Liberty are tilted towards shopping centres.

The cost of getting these companies to manage your property investments is not insignificant. Both British Land and Land Securities incurred operating costs of between 7% to 8% of net rental income over the last two years. That's not significantly cheaper than the 10% you might pay a letting agent with a buy-to-let property. To offset that, however, is the fact that these companies trade at a discount to net asset value. Currently that is around 25% for the sector. Although you may not expect this to narrow over the period you hold the shares, buying income-producing assets at a discount does boost the yield you will receive.

Another alternative would be to invest in a unit or investment trust that specialise in property. Of course, this adds another layer of charges. Investment trusts are traditionally the cheaper of the two alternatives although they do (in most cases) add the complication of a further discount to net asset value and the additional yield kicker this gives.

Analysing the performance of some of these funds can give you a more realistic view of the returns to expect from property. One of the most popular trusts, the TR Property Trust (LSE: TRY), saw its net asset value rise from 40.6p in 1991 to 73.2p in 2001 whilst paying out 12.8p in dividends. That's a return of 8% a year. As you would expect, those who took the plunge in the mid-1990s would have seen a better annual return, nearer 18% in fact.

Investing directly in property companies or investment funds is certainly more cost-effective for smaller amounts of money. It is also a lot more flexible as well. Shares can be bought and sold instantly, although this does mean the prices are more volatile than the underlying value of the assets. On balance, the property sector of the stock market is a viable alternative for those who want exposure to bricks and mortar but are prepared to sacrifice some of the returns to the avoid the dirty work.

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