Forget buy-to-let! I’d consider this compelling property-backed share instead

Total investor returns have been stunning from this defensive and expanding property company. I reckon there could be more to come.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think the outlook for buy-to-let property in 2019 and beyond is a little murky. The government has been acting to discourage investment in the sector by making the tax regime surrounding buy-to-let less appealing than it used to be.

On top of that, I’m worried that property prices have risen so far that they are much less affordable than they used to be a couple of decades ago. The affordability issue is a big one for me because it could mean that property prices are in for a decline, or perhaps a long period of stagnation so that affordability can catch up.

Big risks

Given the huge costs and inconvenience of getting into owning property for rental, I think the prospect of much-diminished overall returns is a big disincentive. I’m also concerned that those taking out a mortgage to go into buy-to-let now could end up in negative equity, with the value of the property slipping below the value of the mortgage. That would not be a happy situation to be in, and it would trap you in your investment unless you decide to take a loss on your investment – potentially a big one!

Just ask those who owned mortgaged property in the late 80s and through the 90s what the agony of negative equity feels like. Indeed, financial gearing because of a mortgage works to magnify gains as property prices rise, but it also multiplies losses if property prices fall. One question to ask is, are you sure you want a geared investment in anything? Borrowing money to invest increases your risk as well as your potential gains.

However, I do like the look of FTSE 250 company Unite Group (LSE: UTG), which owns and operates purpose-built and developed student accommodation in university towns and cities. The firm operates as a Real Estate Investment Trust (REIT), which means it will distribute at least 90% of its income to its investors. So REITs are a good way to tap into the earning potential of an underlying portfolio of property.

Ongoing potential to grow

Yet despite the focus on investor income, Unite’s share price has been performing very well too. It’s around 200% higher than it was five years ago, which reflects the firm’s ongoing expansion. If you’d invested five years ago, you’d be sitting on decent capital gains as well as a growing income from the dividend. And I think there’s potentially a lot more to come from the company.

Chief executive Richard Smith explained in today’s full-year report that the company’s strong financial performance is supported by the brand, the “sector-leading” operating platform, the quality of the portfolio of property, the “deep and valuable” university relationships the firm enjoys, and by sector fundamentals.

Unite posted a range of compelling figures today, but I think the fact that the directors pushed up the total dividend for the year by a whopping 28% speaks volumes about the firm’s performance. It seems to me that there is a high level of consistent demand for rented rooms in the university sector that could insulate the business to some extent from any future economic downturn. Meanwhile, the outlook is positive and the growth strategy is in full swing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »