Many buy-to-let landlords have enjoyed handsome returns in recent years. However, the future may not be as bright, especially for smaller landlords. Rising costs, red tape and hassle, slowing house price growth (falls in some areas), and radical housing policies by opposition political parties, suggest the outlook for buy-to-let could be less profitable and more uncertain.
Discounts and dividends
By contrast, a number of property companies listed on the stock market appear to offer good value and high yields. Many are trading at discounts to net asset value (NAV), giving a margin of safety and scope for long-term capital appreciation. And many are paying generous dividends, providing shareholders with a high level of income.
These large companies have advantages of scale, including being able to borrow at more attractive rates than private landlords. What’s more, you can buy their shares starting with relatively small sums of money, enabling you to spread risk by investing in a number of businesses.
Two property stocks I’d buy
Residential Secure Income (LSE: RESI), which has a yield of 5.5% at its current share price of 91p, and NewRiver REIT (LSE: NRR), sporting an 11.7% yield at a price of 184p, are two property businesses I’d be happy to buy a slice of today.
RESI, which has a 30 September financial year-end, released its annual results this morning, and NewRiver, which has a 31 March year-end, released its interim results. Let’s have a look at what today’s numbers tell us about these two businesses.
RESI, which joined the stock market in July 2017, invests in affordable shared ownership, retirement and local authority housing. It said today it’s now substantially committed its available equity capital and borrowings.
It reported a 3.3% increase in NAV per share over the year to 108.6p, which means the shares are currently trading at a discount of 16%. In other words, if you’re buying the shares today, you’re paying just 84p for every £1 of assets.
Annualised net rental income (96% of which is subject to contractual inflation-linked uplifts) increased 6.7% to £11.2m, and shareholders received dividends of £7.7m. The company said rental income will increase in 2020, not only with inflation, but also as its shared-ownership portfolio comes on stream.
I think this all adds up to RESI being an attractive investment, and one whose 5.5% yield, with prospects of inflation-linked annual increases, appears relatively secure.
NewRiver, which floated on the stock market in 2009, operates in the commercial property sector. I like its positioning in value retail and pubs, which I think offers some resilience through the economic cycle. Nevertheless, as its current 25% discount to NAV and 11.7% dividend yield suggest, the market is pricing it as a higher risk/reward proposition.
Today, the company reported a first-half 7% fall in NAV per share to 244p, mainly due to a non-cash reduction in portfolio valuation. Further write-downs are certainly possible, but I think the discount to NAV offers investors a good margin of safety.
The company’s operating cash measure of £26.4m didn’t cover first-half dividends of £30.8m. Management is pursuing strategies to rebuild cover, but clearly there is risk the dividend may have to be reduced. Still, as with the NAV discount, I think the size of the yield offers a margin of safety in the event the dividend’s rebased.
In short, I think NewRiver’s risk/reward balance is attractive.