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Why I’d dump buy-to-let and invest in this FTSE 100 dividend stock instead

Is buy-to-let property still the best way to build wealth and fund your retirement? High house prices, tax changes and increased regulation mean that for many small landlords, making a profit is harder than it used to be.

In my view, investors wanting to build long-term property wealth can find better opportunities in the stock market. A number of high quality real estate investment trusts (REITs) are now trading at a discount to their book value, with very attractive dividend yields.

A 5.4% income

As I’ve explained before, research published last year suggests to me that very few buy-to-let landlords are likely to enjoy a rental yield of more than 5%, after tax, interest and costs.

On the other hand, investors in FTSE 100 REIT British Land (LSE: BLND) can expect to enjoy a dividend yield of 5.4% in 2019, according to broker forecasts. This £5.5bn investment trust has a £13.7bn property portfolio that’s made up of London office property, major shopping centres, and residential developments.

The group’s properties include Broadgate and Paddington Central in London, Meadowhall in Sheffield, and Drake Circus in Plymouth. Although problems in the retail sector are a concern, lost rent from stores going into administration or Company Voluntary Arrangements over the 18 months was only £14.7m. British Land’s net rental income over the same period was £546m.

On sale at a discount

In my view, there’s definitely a risk that retail rents may continue to fall for some time yet. The value of the group’s retail property fell by 4.5% during the six months to 30 September, and this decline could continue.

However, British Land’s share price already reflects a high degree of uncertainty about the future. At the time of writing, the shares were changing hands for 576p. That’s 38% below the group’s net asset value per share of 939p.

Such a large discount suggests to me that the market is pessimistic about the future. But British Land has low levels of debt and a high-quality, diverse property portfolio. In my view, the firm is well-positioned to handle difficult market conditions.

I believe the stock’s 5%+ yield and discount to book value could mean that now is a good time to buy.

The safest property in the UK?

An alternative way to invest in property is to focus on assets that are very high value and vary scarce. I think a good example of this is London landlord Shaftesbury (LSE: SHB).

This FTSE 250 firm owns 15 acres of real estate in London’s West End, covering key areas such as Chinatown, Covent Garden, and Fitzrovia. Although relatively small, these properties are in sought-after areas that attract affluent residents and many tourists.

The benefits of this strategy are clear. In a trading update today, the company reported “robust footfall and trading” over the festive period. Chief executive Brian Bickell said that most occupiers reported “growth in turnover compared with the same period in 2017.”

Reassuringly expensive?

Owning shares in some of the UK’s most valuable property doesn’t come cheap. At about 882p, Shaftesbury shares trade at a discount of just 11% to their net asset value of 991p per share.

A dividend yield of just 2% means that shareholder income is lower than at British Land. But if you’re looking for a stock you could buy today and hold forever, I think Shaftesbury could fit the bill.

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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.