It’s official! UK house prices are starting to fall. According to the latest numbers from Nationwide, prices have fallen in each of the last two months. This news has strengthened my view that FTSE 100 stocks offer much better opportunities to make money from property than buy-to-let in today’s market.
The stock market also has a second big advantage — you can invest tax-free in a Stocks and Shares ISA. Buy-to-let investors can’t do that.
Buy-to-let vs FTSE 100 stocks
With house prices falling from near-record highs, new buy-to-let investors face the risk of sitting on negative equity for years. Recent government changes also mean tax costs are rising for many landlords. It’s getting harder to make money from property rental.
On the other hand, demand for new housing still seems to be strong — whether purchased or rental. Housebuilders who can satisfy this demand could be an attractive buy after this year’s stock market crash.
A top housebuilder at a fair price?
As lockdown eases, I think housebuilders with healthy finances and a solid order book could enjoy a strong recovery.
My top pick in this sector today is probably FTSE 100 stock Barratt Developments (LSE: BDEV). The firm continued to achieve a “low level of reservations” throughout the lockdown period by selling remotely.
Although site closures mean new builds completed this year will be down on last year, Barratt’s 12,000+ order book is valued at £2.9bn. On 2019 figures, that’s equivalent to more than eight months’ sales. This should provide good earnings visibility.
Barratt went into the Covid-19 pandemic with a £430m of net cash and an unused £700m credit facility. It’s also been approved for a government coronavirus loan, if needed, although I don’t expect this to be taken up.
The Barratt share price has fallen by about 35% so far this year, as investors have priced in a downbeat outlook. But I’m starting to see value here. Barratt shares trade roughly in line with their book value and on just 10 times reduced earnings forecasts.
Barratt has had a good track record of delivery in recent years. I think this stock could offer decent value at current levels.
This FTSE 100 stock is on sale!
My second pick is FTSE 100 REIT British Land (LSE: BLND). This £3.6bn landlord owns prime Central London office properties and shopping centres such as Sheffield’s Meadowhall.
British Land’s share price has tanked this year, falling by nearly 40%. The stock now trades at a 55% discount to its net asset value of 905p. The main reason for this big discount is that valuations on big shopping centres are likely to fall. I expect rental income to be lower when leases are renewed too.
The good news is that British Land’s valuation already reflects these risks. That’s why the share price is so low. If things turn out better than expected — and they could — then the shares could perform well.
In my view, investing in property at this kind of depressed valuation is a smart move for investors seeking long-term gains. I hold this stock and I expect a solid recovery and a decent dividend income over time.
British Land’s properties are good quality and it doesn’t have too much debt. I see this as a buy-and-hold stock at current levels.
