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Thinking about buy-to-let? Here’s what I’d buy instead

Some years ago, I remember working with a woman who was obviously making more money from buy-to-let property than she was from her day job.

There have certainly been many good years for buy-to-let investors. But I don’t think 2019 (or 2020) will be among them.

The two engines of profit for rental investors both appear to be grinding to a halt. House prices are already high and seem to be stagnant or falling in most regions of the UK. Alongside this, the costs and tax burden of being a landlord are increasing.

I think direct property ownership is best left to professionals who have the scale and financial firepower to build resilient, diversified portfolios. But I’m continuing to invest in property through listed property stocks.

Here, I want to look at two companies I believe should provide reliable long-term income and growth.

Big boxes pay well

One area where property demand is strong and seems likely to remain so is modern warehouse space. These massive ‘big box’ units are in demand to serve online retailers, supermarkets and other companies which need large-scale distribution facilities.

A number of dedicated warehouse property firms have emerged to take advantage of this trend. One of my favourites is Tritax Big Box REIT (LSE: BBOX) which owns £3.4bn of logistics property. This portfolio boasts an annual rent roll of £161m and a weighted average unexpired lease term of over 14 years.

The firm’s loan-to-value ratio was a conservative 27% at the end of 2018 and although the company is continuing to develop new sites, this is being done on a pre-let basis. That means building doesn’t go ahead until Tritax has secured a tenant, usually on a 15-20 year lease. In my view, this should restrict the downside risk for shareholders if market conditions soften.

Of course, I’m not the only investor to have spotted the attractions of this sector. Tritax stock trades roughly in line with its net asset value of 152p per share and the stock’s forecast yield of 4.6% isn’t especially high. That’s not a bargain, but is seems fair value to me. I’d be happy to buy the shares for a long-term income portfolio at this level.

Smart regional focus

London gets a lot of attention from property investors. But some industry insiders believe more attractive rental yields are available elsewhere. One company whose managers hold this view is Palace Capital (LSE: PCA), which owns and develops commercial property, primarily in regional university towns.

The firm has grown steadily since its flotation in 2013 but Neil Sinclair, Palace chief executive, says that “pricing in the market at the moment does not provide sustainable value.” As a result, he now plans to focus on maximising the potential of the PCA portfolio, rather than adding new sites.

As a potential shareholder, I welcome this focus on maximising value and cash returns. Dividend cover fell below 1x last year, and the firm’s cash generation didn’t cover its shareholder distribution. Portfolio occupancy of 87% also leaves room for improvement.

At the time of writing, the stock trades at a 33% discount to its net asset value, with a 7% dividend yield. I think this is a fair reflection of the risk and opportunity here.

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