While many investors may wish to gain exposure to the UK’s property market at the present time, doing so via the FTSE 100 could be a better idea than undertaking a buy-to-let. After all, tax changes to buy-to-let investments, as well as more onerous regulations, could mean that its risk/reward opportunity has deteriorated in the last few years.
By contrast, there are a number of FTSE 100 property stocks that could deliver high returns. Among them are housebuilders, as well as real estate investment trusts (REIT). Both categories of stocks could deliver high returns on low valuations.
Housebuilders have continued to enjoy strong operating conditions in recent months. Demand for new homes has remained high – even though consumer confidence is low due to the uncertainty caused by Brexit. Although interest rate rises are expected over the medium term, the Bank of England retains a cautious stance on how quickly they will rise. This could provide continued strong operating conditions across the housebuilding sector over the coming years.
Despite their rising levels of profitability, FTSE 100 housebuilders such as Persimmon and Taylor Wimpey continue to trade on low valuations. For example, they both have price-to-earnings (P/E) ratios of 8 and yet are forecast to post positive net profit growth in the current year.
Certainly, there will be an uncertain period for housebuilders following the end of the government’s Help to Buy scheme. It has provided heightened demand for new homes, and has boosted profitability across the sector. But with it due to run until 2023, there could be continued high returns available for investors over the medium term.
Given the uncertain outlook for the UK economy at the present time, it is perhaps unsurprising that commercial property prices have come under pressure. While this trend may continue over the coming months, in the long run it could present an opportunity for long-term investors to capitalise on what may prove to be wide margins of safety.
FTSE 100 REITs such as British Land and Landsec could be obvious opportunities for investors to take advantage of low valuations in the commercial property sector. They trade on price-to-book (P/B) ratios of just 0.6 and 0.7 respectively, which suggests that they could deliver impressive returns in the long run.
Allied to this are dividend yields that stand at over 5% apiece. The two companies’ yields may in fact be higher than the yields that are available on buy-to-let properties following the rise in residential property prices in recent years. That’s especially the case when costs such as management fees and mortgage payments are deducted.
As such, from a value and income investing perspective, FTSE 100 REITs could deliver higher returns, as well as lower risks, than undertaking a buy-to-let. Alongside housebuilders, there are a range of opportunities within the FTSE 100 for investors seeking to invest in UK property.
Peter Stephens owns shares of British Land Co, Landsec, Persimmon, and Taylor Wimpey. 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.