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Why I’d buy this FTSE 100 dividend stock before any buy-to-let property

The buy-to-let market is getting tougher. Rising tax and regulatory costs plus falling rental yields have put pressure on profits for many landlords.

On top of this, landlords routinely face the headaches of property maintenance, void periods and late-paying tenants.

I prefer to get exposure to the property market by investing in dividend-paying property stocks. Today I want to look at two real estate investment trusts (REITs) which offer very different opportunities.

Own a slice of prime property

FTSE 100 REIT British Land (LSE: BLND) owns a big chunk of prime retail, office and residential space. Properties owned by the group include the Ealing Broadway and Sheffield Meadowhall shopping centres, plus office and residential developments such as London Broadgate and Paddington Central.

Of course, it’s no secret that conditions are tough for retail landlords. The value of British Land’s retail property fell by 4.5% during the first half, according to the firm. Rivals have reported similar figures.

Personally, I suspect that these property values will fall further. I don’t think we’ve reached the end of the rent cuts that are being forced on landlords by struggling retailers. However, I’m confident that in situations like this, it makes sense to buy the best property you can find, at a discount to book value.

British Land ticks these boxes. Occupancy has remained high, at 97.4%. Gearing is modest, at 28%. The group’s prime locations seem likely to continue attracting new tenants, even if rents drop. The shares also trade at an attractive 40% discount to their book value of 967p per share. This should provide us with a margin of safety against further declines in property prices.

The group’s 5.3% dividend yield looks fairly secure to me. I think British Land could be worth buying for long-term dividend investors.

A property growth stock

If you’d prefer to focus on a faster-growing part of the property market, you might want to consider self-storage market leader Big Yellow Group (LSE: BYG).

Big Yellow’s sales rose by 7% to £62.2m during the six months to 30 September, while like-for-like occupancy rose by 1.5% to 84.9% compared to one year ago.

Happily, this growth hasn’t come at the expense of profits. Adjusted pre-tax profit rose by 9% to £33.3m, while average net rent per square foot climbed 3.7% to £26.97. These figures suggest to me that pricing is staying ahead of inflation.

Should I stay or should I go?

One potential criticism of this business is that customers aren’t tied into long-term contracts. The average length of stay for all customers is only 8.5 months, so a slump in demand could leave Big Yellow with lots of expensive empty buildings.

With more people renting and sharing homes, I don’t think demand will fall. My only concern is that the market could become saturated, putting pressure on prices and reducing occupancy levels. Luckily, the company’s freehold property provides some insurance against this risk.

In my view, Big Yellow is one of the best stocks in this sector. My only reservation is that the shares are starting to look expensive, on a price/earnings ratio of 22 and at a 34% premium to book value.

For a business of this kind, I’d want a dividend yield of at least 4%. That suggests a share price of under 820p. At that level, I’d rate the shares as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co. 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.