Most people turn to buy-to-let to make money in the housing market. However, following the recent tax and regulatory changes landlords have had to deal with, I think property stocks are now a better way to make money from real estate.
Indeed, the great thing about owning property stocks is that you do not have to worry about managing any properties. All investors have to do is sit back, relax, and watch the money roll in as the assets are managed on their behalf.
Margin of safety
Real estate investment trust Hammerson (LSE: HMSO) is a great example.
This owner-operator of retail destinations throughout Europe has been under pressure recently due to its extensive portfolio of retail assets in a weak retail environment.
Nevertheless, management has been taking action to reduce the company’s exposure to the high street. It has divested up to £500m worth of assets so far this year, using the proceeds to bolster its balance sheet.
While the company’s exposure to retail property is concerning, Hammerson’s current valuation provides a cushion against further pain.
The stock is trading at a price-to-book ratio of just 0.5, which suggests a wide margin of safety that could lead to improving capital returns in the long run. Also, the trust supports a dividend yield of 8% at the time of writing.
New River Retail (LSE: NRR) is another real estate investment trust that has been punished for its exposure to retail property. The stock has lost around 10% of its value this year, excluding dividends to investors.
While the market is worried about New River’s retail exposure, the company’s underlying fundamentals still show strength. At the end of its fiscal first half, the group reported a 3% increase in underlying funds from operations.
Unfortunately, the company was hit by a 7% decline in property values, but total net property income increased by around £4m year-on-year.
The increase in property income and funds from operations helped improve the company’s interest and dividend cover ratios. So, while the value of New River’s properties might have slipped this year, the firm’s financial position has improved.
The stock appears to offer value as it is currently trading at a price to book value of 0.8, and it provides a dividend yield of 10.8%. These metrics suggest investors could be well rewarded as the property market turns.
Finally, if you are looking for high-quality property stocks, I highly recommend taking a closer look at the Secure Income REIT (LSE: SIR).
Secure Income will only invest in highly defensive assets that have ultra-long rental agreements, such as hospitals and theme parks. Indeed, the portfolio of properties includes the Alton Towers theme park and Thorpe Park.
With these trophy assets on the balance sheet, the stock isn’t cheap, but if you are looking for a guaranteed income stream from some of the most unique property assets in the country, it could be worth paying a premium to invest in Secure.
The stock trades at a price-to-book ratio of one and offers a dividend yield of 4.1% at the time of writing. The value of its property portfolio has grown at a compound annual rate of 12% over the past six years, which suggests that this stock offers the potential for significant capital gains, as well as income over the long term.
Rupert Hargreaves owns no share 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.