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Buy-to-let? I’d buy this Real Estate Investment Trust instead

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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.

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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.