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I’d shun buy-to-let and buy these property stocks instead

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In December, I liked the prospects for Grainger (LSE: GRI) after seeing the shares gain 47% over the year to date.

At the time, I found the UK’s biggest listed residential landlord attractive for the long run. But I felt the shares might be a bit toppy after their 2019 performance. Well, since then, the price is up a further 11%.

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That includes a solid gain over the past week, on the back of a successful share placing that raised £186.7m. The placing was at 305p per share, and the price is now at 338p. Those who subscribed are already sitting on a nice profit.

Acquisition

Grainger seems to be making the most of weakness in the property market, and announced a new acquisition on Tuesday. The company is set to forward fund and acquire a 348-home build-to-rent development in Nottingham. It’s on an old rail side site, and is going to cost £55.6m. It’s Grainger’s first property in Nottingham, and it apparently rates it as a key target city.

This latest acquisition looks like it’s part of a fairly aggressive growth policy from Grainger, coming on the back of news of other expansion deals since the firm’s full-year results were released in November. And I do think it’s coming at a good time.

If you want to earn profits from the residential rental business, I see Grainger as a considerably less risky approach than the individual buy-to-let business. And I think it could be a good long-term buy.

I’m just a bit wary of the stock’s valuation right now, and I want to see its next net asset value figures first.

Property dividend

I’m also drawn to property developer U and I Group (LSE: UAI), whose shares are on significantly lower P/E valuations. The firm specialises in regeneration, putting up new commercial rental real estate amid public developments.

Just a few days ago, Manchester City Council decided to grant planning permission for the first phase of U and I’s Mayfield project in Manchester. The development will create, in addition to a public park, two office buildings plus a 581-space car park. U and I expects the 15-year scheme to deliver £40m-£60m in profit, plus around £40m in development management fees.

Again, this is just the latest in a string of announcements of similar developments, including a project in Lambeth expected to provide £25m-£35m in profit, and a mixed use development at Swanley Shopping Centre in Kent which includes residential space and another car park.

Undervalued

Given the nature of the company’s long-term developments, earnings are erratic on a year-to-year timescale. Based on forecasts out to March 2022, that puts the shares on P/E multiples from as low as 7.8 up to 13. Dividend forecasts are strong, yielding around 5.4%.

If you’re considering buy-to-let, you’ll presumably be expecting ups and downs in your earnings too. Rental voids, maintenance, and other costs mean it’s really a pursuit for those with a long-term horizon.

But I think you’d be pushed to match the yields from U and I, consistently and with relatively low risk. Oh, and with no effort on your part.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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