When it comes to the property market, almost everyone under the sun seems to have an opinion on it. When it comes to stocks, bonds, commodities, cryptocurrencies, or any other asset class, many non-professionals are often reluctant to get involved, as they perceive the area as difficult to understand. By contrast, most investors claim to have a decent understanding of the property sector.
In the UK, the classic adage is that property never goes down in value. While this is not always the case — as house buyers in the UK and Ireland most recently found out to their cost in 2007/08 — this belief has remained remarkably persistent. But that’s understandable as overall, property is an asset class that performs well, assuming it is bought at sensible valuations. This helps to explain the popularity of buy-to-let.
Should you buy-to-let?
Buy-to-let mortgages are available for prospective landlords and while there are certainly some advantages to this investing strategy, it does come with a number of significant drawbacks. For starters, not everyone can afford to take on a large loan to finance the acquisition of another property.
Even if you are in a position where you can finance such a purchase with your own money, you will still face as a landlord. You are responsible for the upkeep of the property, and have legal obligations as the owner. And then there is the question of lack of diversification — a single property may create the problem of having too many eggs in one basket. What happens if property values in your town go down?
For all of these reasons, I believe that real estate investment trusts, or REITs, offer a much better option for investors looking for exposure to the UK property sector. REITs are publicly traded companies that own and operate a portfolio of properties, and that must by law distribute at least 90% of their earnings as dividends to investors. They offer the benefit of diversification at a tiny fraction of the price of a single buy-to-let, and they allow younger investors the chance to enter the property market without having to save up for a mortgage.
Shares of commercial property REIT Landsec (LSE:LAND) are currently trading at 972p a share and carry a dividend yield of 4.8%, which is half a point better than the FTSE 100 average of 4.3%. It currently trades at a price-to-book ratio of 0.75, which suggests that it is undervalued relative to the real assets of the business.
Landsec owns a number of high-profile commercial and retail properties in London, including the Piccadilly Lights. It also owns many office buildings in the City of London. And I think that if you are planning to invest in the British property sector, your best bet is to go after the most highly sought after locations in Central London. But Landsec’s properties outside of London are also strong. Bluewater in Kent, for instance, is one of the UK’s ‘supermalls’ and not feeling the pain of the retail downturn in the way that some smaller shopping centres are.
All in all, it appeals to me so much more than the hassle of being a landlord!
Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has recommended Landsec. 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.