Although buy-to-let properties have been a popular way to generate passive income, the increasing uncertainty around the market in the UK has made this more difficult. Although there is still upside to be found, the risk of any one investment underperforming has increased in the past few years. Accordingly, investors should instead look for businesses that have a broad presence in the property market to minimise this risk. Here are two FTSE 250 companies that fit the bill.
Go to the source
Ibstock (LSE: IBST) is the largest clay brick manufacturer in the UK. The value proposition here is relatively straightforward – the UK currently faces an acute housing shortage, most homes are made of brick, so producers of brick should do quite well. Ibstock controls over 25% of the total market, putting it in a good position when it comes to negotiating prices with housebuilders.
As has been noted elsewhere on the Motley Fool, builders typically do not like to import bricks when they can buy them locally, as they are bulky and heavy. The combination of the national housing shortage, size, and geographical advantage over foreign competition suggests to me that Ibstock is well-positioned for the future.
IBST current trades at just 13 times earnings, and at a yield of 5.3%. Although this yield is worse than some of the other FTSE 250 stocks out there, it is still good and I would prefer to pay slightly more for a dividend stream that I am confident will continue, than to take a chance on a higher yield that may not pan out. With a 20% return on capital employed last year and an 18% increase in free cash flow between 2017 and 2018 (from £55m to £65m), Ibstock should be able to continue the payouts.
Back a winner
For investors looking to gain exposure to the commercial real estate market, REIT Shaftesbury (LSE: SHB) offers an interesting opportunity. Its holdings are concentrated in London’s West End and include buildings in Covent Garden, Soho and Chinatown. When it comes to real estate, a lot of the time the simplest investment theses are the most compelling. Simply put, I believe that commercial space in central London is always going to be a highly sought-after commodity in the long run, even in the event of a disorderly Brexit.
Shaftesbury currently trades at a 20% discount to its net asset value, mainly due to its low dividend growth. It has just a 2% yield, which may seem like too little for some income investors. However, I think that this is more than outweighed by the premium status of the assets operated by SHB, while the discounted price provides a good margin of safety. Historically, betting on major financial and commercial hubs like London has been a winning strategy, and one that I would stick with in this case.
Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has recommended Ibstock. 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.