Buy-to-let landlords are facing an uphill battle to maintain their profits as rental prices are falling and the government is raising taxes and stamp duty on second homes. I think a better way to gain exposure to the UK property market AND leave your portfolio in the hands of an expert is by investing in Picton Property Income (LSE:PCTN).
Picton is a closed-end investment company that focuses on UK commercial property. Shareholders benefit from the rents paid on the properties, which is paid out regularly as a dividend. The dividend currently stands at a healthy 4.3% and is covered 2.8x, which is well above the 1.5x coverage that is a rule of thumb for well protected dividends.
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A closed-end investment company is one that does not issue new shares, therefore the price of the shares is reflected in the demand for them rather than the underlying value of the assets. Picton currently has approximately £674m of UK property, and after you consider cash and debt, that means each share has a ‘value’ of 92.2p compared to the current price of 88.2p. Therefore this structure for the company occasionally gives you the opportunity to buy shares at a discount to the net asset value of each share.
The Brexit problem
There are concerns about the impact that Brexit will have on the value of UK property and I suspect this is the main reason why Picton is currently trading below its net asset value. Fortunately, I think the firm’s management has spread the risk of its portfolio well. The industrial sector is where the highest weighting of commercial property is located, which is seen as one of the safer areas. In addition, its portfolio is sufficiently diversified so that risks are somewhat mitigated in the event of a chaotic Brexit.
Preferential asset class
The main reason that I’d buy this share over a buy-to-let is for the benefits of owning shares over property itself. There are a lot of costs associated with buy-to-let that need to be considered before you can start thinking about your profit. Stamp duty, maintenance, and insurance to name just three. On the other hand, shares require only a small fee of around £10 to purchase and investment companies will then charge an ongoing fee for the management of the fund. In the case of Picton this is 2% which is considerably less than would be required for a buy-to-let.
Shares in an investment company also offer you diversification and liquidity. When you own shares in Picton you hold property in a wide variety of locations that is exposed to a range of sectors. This reduces the risks that you would face if you owned just one property. You can also easily buy and sell shares in a company (known as good liquidity) if you need to access cash or become concerned about your investment. By comparison, it could take months and cost thousands in fees to sell a property.
I think that Picton offers a much more attractive long-term income investment than buy-to-let. Brexit may be casting a shadow over all UK property right now, but it will stabilise eventually and this is a solid investment for someone who wants to own bricks and mortar without the headaches.