I recently wrote about my own experience as a buy-to-let investor, and I see the downside as essentially two-fold.
One concern is that over the long term, I’d almost certainly have enjoyed better returns by buying dividend-paying FTSE 100 stocks and reinvesting the cash. And I’d have had to do a lot less actual work too. The other is the problem of diversification. I have one rental house, and if that one is performing badly (though being vacant or having a problem tenant), there’s nothing else boost my income.
But renting properties, either residential or business, can still be very profitable, so how would I go about it if I started again? I’d go for pooled real estate investment businesses, particularly investment trusts.
Overlooked bargain?
I examined Hammerson (LSE: HMSO) earlier this year, soon after the on-off merger with Intu Properties had come to nothing. I thought it was a good investment then, but the share price has since gone into a bit of a slump — the shares are down 18% since the start of 2018.
That surely reflects the general weak sentiment towards property prices in general and the retail sector specifically — Hammerson invests in business properties, focusing on shopping centres. A lot of retail stocks are similarly falling in price, as are our listed housebuilders — despite the latter being strongly cash generative and paying some of the best dividends around.
I see that as a mistake by the markets, and I reckon Hammerson shares are oversold. We’re looking at forward P/E multiples near the Footsie’s long-term average of around 14, but this is a company that is expected to see its dividend yield hiked to around 6%.
The earnings growth of the past few years looks set to flatten out this year and next, and that must also be contributing to the weak share price performance. But I see it as a buying opportunity.
New development
Grainger (LSE: GRI), which bills itself as “the UK’s largest listed residential landlord and leader in the UK private rented sector,” is a way into the residential market that I like the look of.
Though its share price has had a modest year so far in 2018, its 3% rise is still ahead of the FTSE 100’s 7% fall. And over five years, Grainger shares are up more than 40% (while the Footsie has managed a meagre 6%).
On Friday, Grainger revealed its latest acquisition, of a 108-home build-to-rent development in Tottenham Hale, North London, for approximately £41m. Grainger will forward fund the development, to be carried out by Waterside Places, and it’s expected to provide gross yields of around 5.5% to 6% — which looks attractive to me.
Planning consent already exists, though there are a number of outstanding conditions — but Grainger expects those to be satisfied and construction to start in early 2019, with completion anticipated for approximately two years later.
Grainger’s dividend yields are modest at around 2%, but they’re progressive. And the stock’s overall yield makes it look like another attractive property option to me.
