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

These stocks could be much more profitable than buy-to-let, says Roland Head.

| 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.

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.

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.

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.

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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »