Buy-to-lets have been relatively popular among investors in the last couple of decades. Rising property prices and a lack of rental opportunities versus demand have meant that income and capital growth from buy-to-lets have been high. And with interest rates having been at historic lows for a decade, the overall returns available for buy-to-let investors have been enticing.
Now, though, changes to the tax treatment of buy-to-lets, as well as uncertainty facing the UK economy, mean that listed property stocks could be better investments. With that in mind, here are two London-focused property stocks which could offer wide margins of safety and growth potential.
Reporting on Wednesday was London-focused residential and commercial property business Capital & Counties (LSE: CAPC). Its results for 2018 showed that it has been able to deliver an upbeat performance despite the economic risks that have been in place. Its focus on Covent Garden and the West End has meant that its asset base has performed relatively well, with it having greater resilience than other parts of the UK.
The company experienced a record year for openings across its estate, with its net rental growth being 17%. Although there has been a valuation decline in its investments at Earls Court due to an uncertain performance from the residential property market, its overall property value increased by 1.6% to £2.6bn.
Looking ahead, the share price of Capital & Counties could generate improving performance. It trades on a price-to-book (P/B) ratio of just 0.75, which suggests that it offers a wide margin of safety. Given its diverse asset base and its focus on London, which has historically been a robust property market, its risk/reward ratio appears to be considerably more appealing than that of a buy-to-let.
Also offering an impressive long-term outlook is commercial property business Shaftesbury (LSE: SHB). The company has a solid track record of outperformance versus the wider industry, with its focus on London’s West End providing it with high demand for its various locations. Planning restrictions in its local area mean that supply is limited, while London’s rising population could lead to an improving financial outlook for the business.
The opening of Crossrail could lead to higher demand for the company’s properties, since the vast majority of them are located close to a Crossrail station. And while the outlook for the UK economy may be uncertain, London’s status as an international financial hub could mean that it is able to deliver impressive growth over a sustained time period.
Since Shaftesbury trades on a P/B ratio of 0.9, it appears to offer a significant margin of safety. Given the company’s track record of growth over a long time period, now could be the right time to consider its purchase instead of a buy-to-let. Doing so may reduce an investor’s risk, while allowing them to participate in London’s continued growth story.
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Peter Stephens 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.