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Forget buy-to-let! I’d buy shares in this London-focused REIT

The trend of buy-to-let landlords leaving the market and cashing in their gains in recent months and years has been well reported. Buy-to-let is not as popular with investors as it once was because of a government clampdown in the UK that has made the over-heated sector less attractive.

Those landlords are abandoning the market for good reason, and I wouldn’t want to get into buy-to-let property today because it’s becoming harder to turn a profit from the activity. Instead, I’d rather invest in the shares of property-owning companies listed on the stock market, such as London-focused McKay Securities (LSE: MCKS), which trades as a Real Estate Investment Trust (REIT).

Tax-efficient returns

I like REITs because they save shareholders from paying too much tax. Shareholders are often taxed twice on the profits of non-REIT property companies because first the firm pays corporation tax on income and capital gains and then shareholders often pay tax on the dividends they receive. REITs, on the other hand, enjoy a special tax status, which exempts them from paying corporation tax on the profits of their rental businesses as long as they comply with certain conditions, such as paying out 90% of their property income to shareholders each year, and not engaging in non-property business activities.

When shareholders receive their dividends from a REIT, the tax man treats the income as if it is income from property. So holding shares in a REIT company strikes me as being similar to holding buy-to-let property but without all the hassle that comes with running your own property business. You also get instant diversification across the many underlying property assets that the REIT company owns if you buy some of the shares. I can’t get that kind of spread from buy-to-let because I don’t have enough capital to invest in multiple properties on my own. 

Investing in an attractive geography

McKay Securities specialises in the London and South East office, industrial and warehouse markets, which I think is an attractive area in which to invest. I’m encouraged by today’s full-year report from the firm. In terms of the adjusted figures, gross rental income rose 6.6% on a like-for-like basis compared to the year before, which pushed up earnings per share by 2.1%. The net asset value improved by 1.2% to 326p per share and the directors pushed up the full-year dividend by 2.8%.

Chief executive Simon Perkins explained the directors are wary” of the current political uncertainty but believe the strong fundamentals in the market and the value in the company’s portfolio of investments positions McKay well for future growth. Rental and capital uplifts in the period outperformed the market, which Perkins puts down to the way the company manages its portfolio.

The current share price close to 248p puts the dividend yield just above 4.1% with the company trading at around 0.75 times net asset value. I think the valuation looks attractive.

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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.