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Buy-to-let is dying. I’d buy these FTSE 100 property stocks

Since 2013, house prices have consistently risen faster than rents, according to a new report from estate agents Hamptons International.

That’s put pressure on buy-to-let landlords’ profits, which rely on capital gains from property sales and rental income that’s high enough to cover ownership costs.

Falling returns

Rental yields in London now average just 5.4%, according to Hamptons. In the North East, where yields are highest, the figure is 8.7%.

Those numbers may seem attractive. But rental yield — which compares rent to a property’s purchase price — is calculated before costs such as maintenance, insurance, mortgage interest and void periods. Most landlords’ net yield, after costs and tax, will be much lower.

By contrast, a number of good quality FTSE 100 property stocks offer comparable dividend yields that can be received tax-free and with no costs if the shares are held in a stocks and shares ISA. This is where I’d put my money today.

Owning a slice of London

Rather than paying peak prices for houses, I think it makes more sense to buy property when it’s out of favour and prices have fallen. That’s certainly the case at FTSE 100 retail and office landlord Landsec (LSE: LAND), which released full-year results today.

The value of Landsec’s portfolio fell by 4.1% to £13,750m last year. This was mainly driven by an 11.7% fall in the value of the group’s £2,493m portfolio of shopping centres, which includes part ownership of Bluewater in Kent.

However, the value of Landsec’s £5,266m portfolio of London offices was almost unchanged, while leisure and hotel properties also held up well.

Retail property may have further to fall. But investors buying Landsec shares don’t have to pay the asking price. At about 890p, the stock trades at a discount of more than 30% to its net asset value of 1,339p per share. That looks like a comfortable margin of safety to me.

Landsec plans to focus on the London market for future developments. Over the long term, I expect this to be a profitable strategy. In the meantime, the shares offer a cash dividend yield of 5.1%. In my view, this is a stock to buy and tuck away for income.

Another way to play London housing

I’m staying with London for my second pick today. Berkeley Group Holdings (LSE: BKG) is a well-known housebuilder that’s chaired by founder Tony Pidgley.

Mr Pidgley has an enviable record of timing the market well and spotting cycles early. Berkeley called the top in London property some time ago and is now starting to invest in “the next wave of regeneration sites”.

Profits are expected to fall in 2019/20. But the firm’s clear guidance on profits means that this news should already be factored into the share price.

The group reported net cash of £859.7m at the end of October and expects to return £280m to shareholders each year until 2025. That’s about 217p per share. Some of this is expected to be used for share buybacks, with the rest spent on dividends.

Analysts expect Berkeley to pay a dividend of 203p per share for the current year, giving a forecast yield of 5.5%. For investors with a long-term view, I’d rate Berkeley as a good way to profit from London housing.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.