Forget buy-to-let! I’d generate a passive income from this FTSE 100 property stock

A London focus could make this FTSE 100 (INDEXFTSE: UKX) dividend stock a great income buy, says Roland Head.

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I recently paid for some repairs to the roof of my house. The work was unavoidable but I estimate that if the house was rented, it would have cost me four or five months’ rent.

That means that if I was renting out my house, I’d have lost about 35% of my annual rental income on just that one repair.

I think property investing is like stock market investing. To generate a reliable income, you need a portfolio. Building a property portfolio is out of my reach. But investing in portfolios of high quality property through the stock market is easy and affordable. So that’s what I’ve done.

London focus

One lesson from previous market crashes is that good quality London property tends to be more resilient than anywhere else. This is why one of my top picks for property income would be Landsec (LSE: LAND), the FTSE 100 real estate investment trust formerly known as Land Securities.

Landsec does still own retail property outside London. But this side of its business is being scaled back. According to chief executive Robert Noel, 65% of the firm’s assets by value are in London, and all of its development projects are in the capital.

This strategy hasn’t stopped investors ditching the stock over fears about the future profitability of Landsec’s £2.5bn portfolio of shopping centres. The value of this property fell by 11.7% last year and Mr Noel expects further declines.

Retail exposure is a risk. But Landsec has more than £6.5bn of prime London property to help offset this risk. There’s also a lot of bad news already priced into the stock, which trades at a 37% discount to its net asset value of 1,341p per share.

I’d buy

Landsec has kept debt levels low and has already sold off much of its lower-quality retail property. The firm’s portfolio produced a rental income of £618m last year, 7% higher than the previous year.

For shareholders, a period of uncertainty seems inevitable. But I expect rental income to remain fairly stable. This should support the dividend, which is expected to yield 5.6% this year. I see this as a good entry point for investors wanting a long-term passive income.

Industrial focus

One area where Landsec has no exposure is industrial property. The market for modern warehouse space is booming and there are now a number of REITS specialising in this area.

However, my top pick in this sector is a smaller player, Hansteen Holdings (LSE: HSTN). Hansteen has a market cap of about £400m and owns a portfolio of urban distribution and light industrial properties around the UK.

The company focuses on properties serving local areas rather than the so-called big box logistics properties that are currently attracting premium valuations.

Joint chief executives Morgan Jones and Ian Watson have a track record of good market timing in this sector. They’ve also shown caution and discipline in the face of rising prices, selling some property and returning cash to shareholders.

Together, Mr Jones and Mr Watson own 5.6% — about £22m — of Hansteen stock. This suggests to me that their interests are well-aligned with those of shareholders like me.

At about 92p, HSTN shares trade at a discount of about 10% to their book value and offer a forecast yield of 5.5%. I may buy more over the coming months.

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 owns shares of Hansteen Holdings. The Motley Fool UK has recommended Hansteen Holdings and Landsec. 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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