These days I almost feel like I’m in an AA meeting when I admit to it, but I’m a buy-to-let investor. Or, at least, I was a couple of decades ago and I still have a rental property — I did own two, but demand and returns were falling so I sold one and cleared the mortgage.
When I got into the market, it seemed like a good idea for two reasons. Demand (in a student city) was high and rental yields were decent, plus house prices were reasonable compared to those yields. It turned out well, and in my early years I was getting the high yields I’d hoped for and almost no occupancy voids.
Declining market
But turning the clock forward to today, demand is down, yields are down, and voids are increasing. At least I bought the house when prices were lower, but I wouldn’t dream of entering the buy-to-let market today — essentially because rents have stagnated while house prices have soared.
As my Fool colleague Edward Sheldon has pointed out, average yields are estimated at around 3.6% right now, and that fits with my current experience. But to get that 3.6% requires work.
By contrast, dividend yields on top shares are rising. The Q3 Dividend Dashboard from AJ Bell put expected yields from FTSE 100 stocks at 4.5% for 2018 — and with the index having fallen over the past month, that’s looking closer to 4.8% today.
So why would you go for the hard work of running a rental property to bag 3.6% when you can buy shares then sit back and take bigger dividends with no effort at all?
Solid recovery
It’s been a few years since Royal Bank of Scotland (LSE: RBS) paid any dividends, but that’s all set to change this year with a 3.3% yield currently being forecast — and there’s a pretty strong ‘buy’ consensus from the City’s analysts at the moment.
While that might not be a buy-to-let-busting return this year, forecasts see the RBS dividend yield rising to around 6% next year — and that would be more than twice covered by earnings. It would also turn the bank into one of the top FTSE 100 dividend yielders in 2019, though that all depends on RBS’s ability to keep up with those expectations over the long term.
Brexit is almost certain to cause some hurt to the banking sector. And though RBS is very much focused on the domestic market these days, the feared fall in mortgage demand is something that could impact its bottom line.
Static market
The latest 2019 forecast by the Royal Institution of Chartered Surveyors (RICS) suggests housing demand will continue in its current somewhat sluggish fashion. But the worst RICS is forecasting seems to be a static market in 2019 as growth slows.
What I’m seeing is far more fear built in to the RBS share price than is actually justified, and self-reinforcing downward pressure. When investors expect fear to push share prices down, they’ll sell just to try to beat the drop, regardless of whether they think the fears are justified.
That’s pushed RBS shares down to a P/E multiple of just 7.5, which is only around half the FTSE 100’s long-term valuation. And that seems too cheap to me.
