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Forget buy-to-let! I’d consider this compelling property-backed share instead

I think the outlook for buy-to-let property in 2019 and beyond is a little murky. The government has been acting to discourage investment in the sector by making the tax regime surrounding buy-to-let less appealing than it used to be.

On top of that, I’m worried that property prices have risen so far that they are much less affordable than they used to be a couple of decades ago. The affordability issue is a big one for me because it could mean that property prices are in for a decline, or perhaps a long period of stagnation so that affordability can catch up.

Big risks

Given the huge costs and inconvenience of getting into owning property for rental, I think the prospect of much-diminished overall returns is a big disincentive. I’m also concerned that those taking out a mortgage to go into buy-to-let now could end up in negative equity, with the value of the property slipping below the value of the mortgage. That would not be a happy situation to be in, and it would trap you in your investment unless you decide to take a loss on your investment – potentially a big one!

Just ask those who owned mortgaged property in the late 80s and through the 90s what the agony of negative equity feels like. Indeed, financial gearing because of a mortgage works to magnify gains as property prices rise, but it also multiplies losses if property prices fall. One question to ask is, are you sure you want a geared investment in anything? Borrowing money to invest increases your risk as well as your potential gains.

However, I do like the look of FTSE 250 company Unite Group  (LSE: UTG), which owns and operates purpose-built and developed student accommodation in university towns and cities. The firm operates as a Real Estate Investment Trust (REIT), which means it will distribute at least 90% of its income to its investors. So REITs are a good way to tap into the earning potential of an underlying portfolio of property.

Ongoing potential to grow

Yet despite the focus on investor income, Unite’s share price has been performing very well too. It’s around 200% higher than it was five years ago, which reflects the firm’s ongoing expansion. If you’d invested five years ago, you’d be sitting on decent capital gains as well as a growing income from the dividend. And I think there’s potentially a lot more to come from the company.

Chief executive Richard Smith explained in today’s full-year report that the company’s strong financial performance is supported by the brand, the “sector-leading” operating platform, the quality of the portfolio of property, the “deep and valuable” university relationships the firm enjoys, and by sector fundamentals.

Unite posted a range of compelling figures today, but I think the fact that the directors pushed up the total dividend for the year by a whopping 28% speaks volumes about the firm’s performance. It seems to me that there is a high level of consistent demand for rented rooms in the university sector that could insulate the business to some extent from any future economic downturn. Meanwhile, the outlook is positive and the growth strategy is in full swing.

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Kevin Godbold has no position in any share 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.