Buy-to-let investing has produced a tremendous amount of wealth for investors over the past few decades, but the asset class is no longer as attractive as it once was. New tax rules have hurt returns for landlords while new regulations have increased costs for property owners, hitting already slim profit margins.
With this being the case, rather than investing in buy-to-let, I’ve put my money in two blue-chip property stocks that I think look particularly attractive at the moment.
Real estate investing
Landsec (LSE: LAND) and British Land (LSE: BLND) are the UK’s two largest listed real estate investment trusts. Recently, investor sentiment has turned against these two companies because they both have exposure to retail assets.
However, in my opinion, it seems the market is only concentrating on the negatives here, and ignoring the best qualities of these two property giants. For example, while both companies have exposure to retail assets, exposure is relatively limited, and managements are taking action to shift the portfolios away from low-quality properties.
According to the company’s most recent report on its property holdings, at the end of September, around 39% of Landsec’s £14bn property portfolio was comprised of retail assets outside of London, including the group’s 30% interest in giant mall Bluewater. British Land has a higher allocation, with around 50% of assets invested in properties. Management wants to bring the figure down to between 30% to 35% in the near term. To that end, the firm has sold or agreed on the sale of £634m (roughly 10% of the retail portfolio) in the 12 months to the end of September.
While it is true that these retail properties could cause British Land and Landsec some problems in the years ahead, the market is currently suggesting that these properties are worth 40% less than the two companies think they are, which seems unrealistic.
At the time of writing, shares in Landsec and British Land are trading at a discount to net asset value of 40% and 44% respectively. In fact, these valuations imply the retail components of both companies’ property portfolios are worth zero. It is difficult to imagine any scenario where these companies would have to sell their properties for 40% less than they are currently worth, so I think this is a great opportunity for value-seeking investors to buy two well-diversified retail investment trusts at deeply discounted valuations.
As well as attractive valuations, these two stocks support market-beating dividend yields. Shares in Landsec and British Land currently yield 5.8%.
The bottom line
Overall, I think shares in both are a steal today. While the outlook for these two businesses is not crystal clear, I reckon the market is overstating the worst case scenario.
With this being the case, I’m happy to snap up shares in these two high-quality property stocks at an extreme discount.
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Rupert Hargreaves owns shares in British Land Co and Landsec. The Motley Fool UK has recommended British Land Co and Landsec. 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.