While there are continued concerns surrounding the affordability of UK house prices, a number of FTSE 100 housebuilders offer wide margins of safety. As such, it could prove to be a good time to avoid the buy-to-let sector, with tax changes also reducing its return potential, and instead buy FTSE 100-listed housebuilders such as Persimmon and Berkeley Group.
Valuations
With the house-price-to-earnings ratio having moved to a record level in the last couple of years, house prices may fail to deliver the high returns of previous years. This may limit the amount of capital growth which is available to buy-to-let investors, with the strong growth rate since the financial crisis appearing to be drawing to a close.
Although this may also impact on housebuilders, they continue to see high levels of demand for their new-build homes. This is unlikely to change over the medium term, since there is a fundamental lack of housing across the UK. Even if Brexit causes a degree of disruption, London’s status as a global financial centre is likely to remain intact, which could drive demand higher at all price points over the coming years.
Furthermore, shares across the housebuilding sector offer wide margins of safety at the present time. Persimmon, for example, has a price-to-earnings (P/E) ratio of around 9, while Berkeley Group’s rating stands at 10. Therefore, even if house prices do not rise, investors in the two stocks may benefit from a potential upward re-rating over the coming years.
Risks
For many people, investing in the buy-to-let sector means owning a few properties at most. Of course, there are some investors who build large-scale property portfolios, but for most it is a second home which generates an income each month.
Having a small number of properties within a portfolio exposes an investor to significant risks. For example, if they own one property and their tenant is unable to pay rent, they are still liable for mortgage costs, agents fees and repair costs. This could severely harm their financial situation, and means that the risks of investing in buy-to-let could outweigh their potential returns.
In contrast, investing in Persimmon or Berkeley means that an individual is exposed to a business which has a wide range of assets in a variety of locations. The risk of them experiencing significant financial challenges may therefore be lower than for a small buy-to-let investor. As such, the two companies may have superior risk/reward ratios than a buy-to-let property.
Changing industry
As mentioned, tax changes also make buy-to-let investing less appealing. A stamp duty surcharge on second homes and changes to mortgage interest payments being tax deductible mean that buying housebuilders through a stocks and shares ISA could be a more tax-efficient move. It all means that after a long period of growth, buy-to-let investing could be so much less appealing than buying shares in the housebuilders themselves.
