In its day, buy-to-let was a great way of investing in the property market, until it fell victim to its own success. Former Chancellor George Osborne decided it made life too hard for first-time buyers, and launched a brutal tax crackdown that is driving amateur landlords out of the market.
The good news is there are other ways of benefiting from the growth and income opportunities available from the UK property market. Better still, you can invest free of tax, via your Stocks and Shares ISA allowance.
UK housebuilders were hit particularly hard by the EU referendum result. House price growth has slowed, but there has been no sell-off, and while London has been slowing, other regions have compensated by playing catch-up.
FTSE 250 listed developer Bellway (LSE: BWY) builds traditional family housing across the UK, and apartments within outer London boroughs, giving it a good geographical spread. Its share price is trading 85% higher than five years ago, helped by recent positive results, which saw house completions climb 5% to hit a record 10,892, with profit before tax up 3.4% to £662.6m.
The £4bn group has a strong balance sheet with net cash of £201.2m, which also gives it capacity for future investment. Yet at the same time, it has a wide safety margin, trading at just 7.1 times forward earnings, while offering a forecast yield of 4.5%, covered 3.1 times.
Demand for property has been underpinned by the Help to Buy equity loan scheme, and could take a knock when that is limited to first-time buyers in 2021, then ends altogether in 2023. Brexit and the election also create some uncertainty but you could say that about almost every stock right now.
Alternatively, you could invest in commercial property instead, through the shares of Derwent London (LSE: DLN), which targets niche urban areas within central London. This £4bn FTSE 250-listed real estate investment trust (REIT) owns and runs an investment portfolio of 5.7m sq ft, of which 98% is located right in the centre of the capital, specifically the West End and the areas bordering the City of London.
It is well placed to benefit from the arrival of Crossrail with over 70% of its buildings within 800 metres of a station on the forthcoming route, and it has also shrugged off the slowdown in London’s property market and Brexit concerns. Earlier this month, it reported a 46% jump in lettings to £33.5m, and a drop in the vacancy rate down to 0.6%.
London is still a massive global draw and Derwent should benefit if we get some kind of Brexit resolution, and international money flows back into the country. Its share price is up more than 20% in the last three months and this could be a good way to play returning confidence.
The loan-to-value (LTV) ratio on its properties was just 16.4% at the end of September, and it has now increased its annual dividend for 26 consecutive years. It is currently trading on a low price-to-book value, while the share price trades at a discount of 8.33% compared to net asset value. Derwent London looks a strong long-term buy-and-hold, particularly for income seekers.
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Harvey Jones has no position in any of the shares 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.