“The times are tough now, just getting tougher.” I’m sure Bruce Springsteen wasn’t talking about the buy-to-let market when he wrote those lyrics. But he could well have been.
Let’s make no bones about it. A blend of snail-like property price growth, plummeting tax relief, increased operating costs (whether through the new Tenant Fees Act or new regulations related to HMOs) and a gradual transference of rights from landlord to tenant is making life really quite hellish for property investors today.
The subsequent impact of these measures on landlords’ wallets is perfectly illustrated by latest research on the sector just released by BondMason. According to the property investment experts, returns for the average private landlord have risen a rather pathetic 1.8% over the past 12 months.
Chief executive of the firm Stephen Findlay comments that “the uncertainty in the current UK economic climate has continued to weigh on the sector.” And with the political and economic fog because of Brexit as opaque as ever, I’m certainly not expecting buy-to-let returns to pick up any time soon. And neither does BondMason, which is predicting “further instability” in the coming months.
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The question is why anyone would be content with sub-2% returns — paltry gains which are likely to persist for god knows how long given all of the reasons outlined above — when there’s an opportunity to make some seriously big returns elsewhere?
For those seeking exposure to the property market, I consider Redrow (LSE: RDW) to be a much better way of making money. Total returns here, by comparison, have surged by a mighty 11% over the past 12 months, even though the housebuilder’s share price has basically flatlined in that time.
Don’t be fooled, though. Poor investor interest doesn’t reflect the ongoing strength of trading conditions in the newbuild market, an environment which is allowing Redrow to supercharge ordinary dividends and shell out some enormous supplementary dividends as well.
Stunning dividend yields
The FTSE 250 firm is one hell of a profits and cash creator and, thanks to a combination of über-favourable mortgage products and a lack of existing properties entering the market, it looks set to continue making terrific progress on both fronts. A further flurry of positive trading updates from across the sector in recent weeks certainly suggests that it should.
No wonder City analysts are expecting more dividend growth, meaning Redrow still carries a forward yield a shade off 10%.
That’s not to say returns will remain as strong as they have over the past year, given investor tension over Brexit and the subsequent impact this may have on the share price in the near term. I would still happily load up on Redrow given the scale of Britain’s housing shortage, a situation that should play into the builder’s hands and generate terrific returns for many years to come.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.