There’s no doubt many people have made a lot of money from buy-to-let property over the last 20 years. But high property prices, rising tax costs and the risk of a UK economic slowdown suggest to me this isn’t the right time to commit fresh capital to buy-to-let property.
Although ultra-low mortgage rates may make headline rental yields seem attractive, it’s worth remembering unexpected repair costs and void periods can quickly eat into these ‘profits’. And if house prices fall, then any gains from rental income may be offset by capital losses.
I think that better options are available in the stock market for investors who want exposure to UK property. Here, I want to look at two popular companies operating in this sector.
A 12% yield for savvy investors?
When FTSE 100 housebuilder Persimmon (LSE: PSN) hit the news due to a rash of customer complaints about poor build quality, my view was it might be safer for investors to focus on rival firms with five-star HBF ratings.
With the risk of a housing slowdown on the horizon, I still think it makes sense to focus on quality. But Persimmon is taking steps to improve the quality of its homes and position itself for a slower market. With a 12% dividend yield expected each year until 2021, I think it could be time to take a fresh look at this stock.
What’s changed?
Persimmon is slowing down the release of new property onto the market by not putting houses on sale until later in the construction process. This is expected to reduce build quality issues and keep sales stable if demand slows.
Early results are said to be positive. But this strategy isn’t without risk, in my view. As Persimmon’s build rate has remained fairly stable, inventories of unsold property were 19% higher at the end of June than they were one year earlier. If buyer demand slows, then future profits on this inventory could be lower than expected.
However, despite the stock’s 30% fall since June 2018, my research shows the PSN share price has outperformed most rivals over the last five years. The company’s cash position remains strong and the 12% yield looks safe for the next couple of years, at least. With the shares trading under 2,000p, I’d consider this as a possible buy.
Students power profits
An increasing number of builders are focusing on growing demand for build-to-rent property. FTSE 250 firm Unite Group (LSE: UTG) has taken this one step further by focusing its efforts on creating purpose-built accommodation for university students.
This strategy has been extremely successful and UTG stock has risen by 57% over the last two years, and by 137% over five years.
An update today confirmed the value of these properties is continuing to rise. Unite said the value of properties in its Unite UK Student Accommodation Fund (USAF) rose to £2,399m during the second quarter. On a like-for-like basis, that’s a 1.3% increase on the previous year.
My view
I think Unite looks like a good business. But returns on capital are only average, at about 6.5%. Given this, UTG stock looks expensive to me, on 26 times forecast earnings and at a 40% premium to book value. The dividend yield of 3.2% isn’t high enough to tempt me. I believe there will be better times to buy.
