The outlook for buy-to-let property investment looks uncertain at the moment. Not only are landlords facing the toxic combination of lower rental yields and stalling house prices, but the UK government has also introduced a number of measures – such as higher stamp duty and burdensome landlord responsibilities – that make this form of property investment far less appealing than it used to be. Whereas once upon a time buy-to-let property was a ticket to wealth, the investment case is now far more opaque.
That said, there are other areas of the UK property market that offer investment appeal right now. And one area that is booming at present is the warehouse sector. Once considered a boring sub-sector of the property market, demand for warehouses is skyrocketing thanks to the boom in online shopping. So how can savvy investors profit?
Strong demand for warehouse space
It’s no secret that the way we shop has changed dramatically over the last decade. Gone are the days of wandering the high street for hours looking for a new TV, pair of shoes, or dress – these days consumers are often likely to visit websites such as Amazon, ASOS, or Boohoo and order their goods online.
Naturally, this shift to online shopping has created a strong demand for warehouse space, as online retailers need somewhere to store their goods. Indeed, according to the CBRE 2018 Global Industrial & Logistics Prime Rents report, the online shopping boom has doubled the demand for warehouse space in the last decade.
For every extra £1bn of online retail sales in the UK, retailers need to find an additional 1.125m square feet of distribution space. Yet it’s not always straightforward to locate new warehouses – supply is limited and build costs are high. So, there are attractive supply and demand dynamics at play here. And companies that specialise in managing warehouse space are profiting.
An easy way to profit
One of my favourite ways to play this theme is FTSE 250 stock Tritax Big Box (LSE: BBOX) – a property company dedicated to investing in very large logistics facilities known as ‘big boxes’. The £2.5bn market cap group owns an enviable portfolio of big boxes across the UK that are typically fully-let on long leases to blue-chip tenants such as Amazon, B&Q and Argos, meaning the group looks well placed to generate consistent returns for investors in the years ahead.
Full-year results from Tritax, released in early March, showed another year of strong progress. The value of the group’s property portfolio surged 31%, while operating profit increased 21%. The company also hiked its dividend by 4.7%, marking four consecutive dividend increases since the group’s first dividend in FY2014, and Chairman Richard Jewson stated that the market had remained “robust” despite Brexit uncertainty.
BBOX shares offer an attractive dividend yield of around 4.5% right now, which can be tax-free if the stock is held in a Stocks & Shares ISA. I’m expecting long-term capital growth here too, despite the fact the stock currently trades on a slightly expensive P/E ratio of 21. Overall, I see BBOX as a much easier way to profit from property than buy-to-let. With online shopping likely to continue to drive demand for warehouse space, the stock looks primed to deliver robust returns for investors in my view.
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Edward Sheldon owns shares in Tritax Big Box REIT and Boohoo. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and ASOS. The Motley Fool UK has recommended boohoo group and Tritax Big Box REIT. 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.