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

Given all the bad press buy-to-let has been getting, I’d avoid the sector. I’m not alone, as private landlords have been selling up and cashing in their gains in droves.

But apart from an increasingly punitive tax environment that’s making it harder to make buy-to-let pay, I worry about the lack of diversification facing many private landlords.

Personally, I could never afford to start a real estate business with multiple properties because I haven’t got enough capital. And I don’t want all my investment hopes tied up in just one or two buildings in case something goes badly wrong.

New to REIT status

That’s why I’m so attracted to stock-market-listed property-owning companies, particularly those operating as Real Estate Investment Trusts (REITs). Property firms tend to own many underlying assets, so if I buy shares in a property-owning company, my investment is diversified across many assets underpinning the stock. And when property companies operate as REITs, shareholders gain a tax advantage on their total returns from holding the shares compared to owning shares in property firms that don’t have REIT status.

I like the look of Picton Property Income (LSE: PCTN), which converted to REIT status during October 2018. The company owns commercial property up and down the UK focused in the sectors of Industrial, Office, and Retail & Leisure. Tenants include some well-known names such as public sector organisations, B&Q, Belkin, DHL, Snorkel, The Random House Group and TK Maxx.

The firm started up in 2005 and now owns around 49 assets worth about £685m in total. Rental income is diversified across some 350 occupiers, which is a spread I’d be unlikely to achieve from any buy-to-let operation might set up myself.

Meanwhile, I find today’s full-year report encouraging. Net asset value rose 2.5% compared to the year before, to 93p per share and adjusted earnings per share came in almost 2.4% higher. The directors nudged up the total dividend for the year by nearly 3%.

Falling debt and potential upside

The company managed to reduce its net debt by 9% during the period and now has a loan-to-property-value ratio of around 25%, which strikes me as a comfortable level of borrowings. Meanwhile, occupancy runs at 90%, but Picton isn’t content to merely buy and hold investments indefinitely and made two disposals raising £12m in the period “9.7% ahead of March 2018 valuations.” 

The realisation of value in that way gives the firm funds to reinvest and during the year it ploughed £1.6m into refurbishment projects.

Looking forward, the company thinks Brexit uncertainty will continue to make the property market challenging for some time, particularly because of delayed decision making by market participants.

But the directors believe that the firm’s “modest” financial gearing and portfolio of interests put it in a good position.” Upside will likely come from leasing the company’s vacant space, lease restructuring, asset management, and new investment opportunities, they said in the report.

With the share price close to 98p, the price-to-book value runs at just over one and the dividend yield a little under four. I think Picton’s shares are well worth my further consideration.

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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.