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3 property stocks I’d buy instead of buy-to-let

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A house being constructed in the countryside
Image source: Getty Images.

The buy-to-let market is getting tougher. High house prices and rising costs mean that rental yields are lower than in the past. The risk of rising interest rates is another concern.

As my colleague Royston Wild explained recently, landlords are ditching buy-to-let in favour of better opportunities. In this article I’m going to highlight three property-related stocks I believe could be much more profitable than buy-to-let.

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There’s still money in building

A slowdown in the buy-to-let market doesn’t mean that demand for housing has fallen. Would-be homeowners are still flocking to buy new houses with the help of the government’s Help to Buy scheme.

Alongside this, institutional investors are investing in bulk-buy rental property deals as a long-term investment.

All of this means that the UK’s major housebuilders are still performing well. My top pick in this sector is FTSE 250 firm Redrow (LSE: RDW). Founder Steve Morgan returned to the business 10 years ago, in the wake of the financial crisis. He’s patiently rebuilt the firm into a quality operator with a very strong balance sheet.

An operating margin of almost 20% supports strong cash generation, while the balance sheet is now free of debt. The forecast dividend yield for the current year is 4.7%, plus an extra 2% from a special dividend, giving 6.7% in total.

Mr Morgan has now retired from Redrow for a second time. But I believe he’s left behind a solid business, with a sustainable dividend and a positive outlook.

Bricks and blocks

An alternative way to invest in property is to own shares in companies that produce essential materials, locally. In this case, I’m looking at brick maker Forterra (LSE: FORT).

Some industries can be disrupted by cheaper imports. But builders always favour local brick supplies where possible because bricks are heavy, bulky and relatively low value. This means long distance transport costs are high, compared to the price of the product.

Like its peers, Forterra is reporting strong demand. Sales rose by 11% to £367.5m in 2018, while pre-tax profit was 9.3% higher, at £64.8m. I was pleased to see that net debt fell by 36% to £38.8m, providing good evidence of the group’s strong cash generation.

The risk here is that profits could slump in a downturn. But there’s no sign of this so far. With operating profit margins running at 18% and the shares yielding 3.5%, I believe the shares remain attractive.

A cautious approach

One company I’ve followed for a while and been consistently impressed by is industrial property landlord Hansteen Holdings (LSE: HSTN). Unlike some rivals, management here has used high prices as an opportunity to sell some assets, repay debt and return cash to shareholders.

The company’s business model is to buy, improve and sell property. Management expects to be net sellers for the foreseeable future until more attractive buying opportunities emerge. Not everyone will agree with this approach, but in my view it has some merit. I think this disciplined strategy is much less risky than that of companies which continue to expand at all costs in a rising market.

At some point, the tide will turn. In the meantime, Hansteen shares trade at a 10% discount to their net asset value of 100p and offer a forecast yield of 5.4%. The stock remains on my buy list and could soon find its way into my portfolio.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hansteen Holdings and Redrow. 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.

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