There’s a number of reasons I wouldn’t go into the buy-to-let market now, one of which is that, assuming you don’t have the cash to buy a whole string of properties, all your eggs end up in one basket.
You have one residential property, and you have a good tenant who’s paying regularly and everything is fine. But then, later, what if your tenant leaves and your next one isn’t so good? It can be very hard to get rid of a bad tenant, and very costly — it’s something that’s happened to me. Or say you can’t find a new tenant right away? You might have a void for weeks, or even months, perhaps many months — that’s happened to me too.
Compare to shares
These are things that are easily overlooked when you’re comparing potential rental income to likely stock market returns. Now sure, companies can take a break from paying dividends when times are tough, which I guess is the equivalent of a rental void. But you can allocate your investment cash across multiple stocks, to spread the risk, far more easily than you can with a property investment.
The other downside is that, unless you have the price of a high-street store, a shopping centre, or a factory to invest, you’re ruled out of investing directly in the commercial property market. And, despite the current retail slowdown, I rate that as a solid long-term investment.
But there are ways to invest in property which avoid these shortcomings, and leave you with no hands-on management to do, and that’s to buy shares in a real estate investment trust (REIT). I’m looking at one of those today.
It’s Shaftesbury (LSE: SHB), which owns a chunk of London’s West End, including a number of properties on the world-famous Carnaby Street. The share price is down 4% as I write, on the back of 2019 full-year results, which show that even such esteemed real estate isn’t immune to wider economic troubles.
Full-year pre-tax profit was reduced from £175.5m a year ago to just £26m, but that’s largely due to an asset revaluation. Net property income rose by 4.5%, earnings on an EPRA basis gained 5.6%, and the company lifted its dividend by 5.4% to 17.7p per share for a modest yield of 1.9%.
Chief executive Brian Bickell spoke of “an impossible-to-replicate resilient portfolio,” and that to me is the firm’s key asset. We talk about competitive advantages and barriers to entry all the time here, and owning some of the most desirable retail real estate on earth is something that really can’t be beaten.
Shaftesbury puts its EPRA net asset value at 982p per share, and that puts the current share price (after the day’s drop) on a discount of 5.7%. That’s not as big a discount as other REITs, but I think that shows the resilience of trusts investing in the most desirable properties. And even after the day’s share price fall, Shaftesbury shares are still up 20% over the past five (dreadful retail) years, compared to a 10% gain for the FTSE 100.
I expect Shaftesbury will very rarely, if ever, experience a lengthy void in any of its top-quality West End properties, and that makes it a buy for me for property investors.
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Alan Oscroft 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.