Discounts and dividends

By contrast, a number of property companies listed on the stock market appear to offer good value and high yields. Many are trading at discounts to net asset value (NAV), giving a margin of safety and scope for long-term capital appreciation. And many are paying generous dividends, providing shareholders with a high level of income.

These large companies have advantages of scale, including being able to borrow at more attractive rates than private landlords. What’s more, you can buy their shares starting with relatively small sums of money, enabling you to spread risk by investing in a number of businesses.

Two property stocks I’d buy

Residential Secure Income (LSE: RESI), which has a yield of 5.5% at its current share price of 91p, and NewRiver REIT (LSE: NRR), sporting an 11.7% yield at a price of 184p, are two property businesses I’d be happy to buy a slice of today.

RESI, which has a 30 September financial year-end, released its annual results this morning, and NewRiver, which has a 31 March year-end, released its interim results. Let’s have a look at what today’s numbers tell us about these two businesses.

Relatively secure

RESI, which joined the stock market in July 2017, invests in affordable shared ownership, retirement and local authority housing. It said today it’s now substantially committed its available equity capital and borrowings.

It reported a 3.3% increase in NAV per share over the year to 108.6p, which means the shares are currently trading at a discount of 16%. In other words, if you’re buying the shares today, you’re paying just 84p for every £1 of assets.

Annualised net rental income (96% of which is subject to contractual inflation-linked uplifts) increased 6.7% to £11.2m, and shareholders received dividends of £7.7m. The company said rental income will increase in 2020, not only with inflation, but also as its shared-ownership portfolio comes on stream.

I think this all adds up to RESI being an attractive investment, and one whose 5.5% yield, with prospects of inflation-linked annual increases, appears relatively secure.

Higher risk/reward

NewRiver, which floated on the stock market in 2009, operates in the commercial property sector. I like its positioning in value retail and pubs, which I think offers some resilience through the economic cycle. Nevertheless, as its current 25% discount to NAV and 11.7% dividend yield suggest, the market is pricing it as a higher risk/reward proposition.

Today, the company reported a first-half 7% fall in NAV per share to 244p, mainly due to a non-cash reduction in portfolio valuation. Further write-downs are certainly possible, but I think the discount to NAV offers investors a good margin of safety.

The company’s operating cash measure of £26.4m didn’t cover first-half dividends of £30.8m. Management is pursuing strategies to rebuild cover, but clearly there is risk the dividend may have to be reduced. Still, as with the NAV discount, I think the size of the yield offers a margin of safety in the event the dividend’s rebased.

In short, I think NewRiver’s risk/reward balance is attractive.

The post Forget buy-to-let! I like these FTSE property stocks yielding 5.5% and 11.7% appeared first on The Motley Fool UK.

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G A Chester 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.

However, more recently, tax changes and the introduction of stricter lending criteria have provided further reasons for many buy-to-let landlords and aspiring landlords to wring their hands in frustration. The result? Figures from Shawbrook Bank show the proportion of buy-to-let mortgages completed by individual landlords has fallen from 68% in the first half of 2015 to 34% in the first half of 2018. Meanwhile, over the same period, the proportion completed by limited companies has doubled from 32% to 64%.

The sector remains attractive for those operators with scale and professionalism, but how can the rest of us profit? Well, there’s a dead easy way. We can buy shares in two real estate investment trusts that listed on the stock market last year: Residential Secure Income (LSE: RESI) and PRS REIT (LSE: PRSR). Once fully invested, the former is targeting a dividend yield of 5% a year and the latter a yield of at least 6%. Thereafter, both companies expect to increase their annual dividends broadly in line with inflation.

On offer right now

Residential Secure Income raised £300m in its initial public offering (IPO) and a further £250m early this year. It focuses mainly on retirement housing, and shared ownership housing, as well as leasing housing to local authorities for the vulnerable.

PRS REIT raised £250m in its IPO. Its focus is on newly-built rental homes, mainly for families, in areas near key centres of employment, with convenient access to transport infrastructure, and close to good primary schools.

I believe it’s worth buying both stocks, because together they provide good diversification across various residential housing sub-sectors. Furthermore, I believe they’re worth buying right now. This is because those target yields I mentioned earlier are based on their IPO share prices of 100p. Both stocks are currently below that level, meaning investors today are locking in higher initial yields than the targeted 5% and 6%.

Diversification

The beauty of the stock market is that you can diversify the sources of your income beyond residential housing. You could invest in a big, commercial property player like British Land, giving you exposure to offices and shops. This stock currently offers a prospective dividend yield of 5.6%. In addition, there are numerous companies specialising in niche sub-sectors of the property rental market. For example, Primary Health Properties concentrates exclusively on modern primary health facilities in the UK and Ireland. This stock currently offers a prospective dividend yield of 5%.

Furthermore, there’s no need to stick to property companies. Indeed, I would highly recommend diversifying across a range of industries and sectors. Right now, there are plenty of yields in excess of 5% available. Vodafone, Shell, HSBC, GlaxosmithKline, British American Tobacco, and United Utilities to name but a few.

Of course, dividends are not guaranteed. Sometimes a company may suspend or reduce its dividend for one reason or another. However, holding a diversified portfolio of stocks reduces the impact of any individual company cutting its payout. As such, diversification is the way I’d go.

The post These stock market buy-to-let investment companies offer 5%+ yields appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended British Land Co, HSBC Holdings, and Primary Health Properties. 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.

Prospective new investors should also bear in mind that buy-to-let investments can be incredibly time consuming and stressful. Personally, I think I spend enough time making sure my gas and electrical appliances work without worrying about someone else’s. There are also great risks involved, as lengthy void periods or tenants not paying rent could cause you to lose your property if you can’t cover the cost of your mortgage payments.

Residential REITs

However, there is another way to invest in residential property. Over the past two years, there have been a number of new UK residential real estate investment trusts (REITs) listing on the London Stock Exchange. These investment vehicles offer a quick and easy route to investing in residential property and enable shareholders to spread the risk across multiple investment properties.

The Residential Secure income REIT (LSE: RESI), which invests in a mix of shared ownership, market rental, functional and sub-market housing, gives shareholders exposure to UK house price movements combined with steady income streams derived from strong covenants and long leases.

The REIT, which debuted with its IPO in July 2017, seeks to deliver an inflation-linked target annual dividend of 5% and total returns in excess of 8% per annum, assuming RPI inflation of 2.5%. ReSI’s objective is to deliver long-term stable inflation-linked returns to its shareholders by acquiring high quality residential assets which comprise the stock of UK social housing providers.

With the £180m that the company has raised in its IPO, it has so far invested in 1,772 retirement residential units located across England, Scotland and Wales. These investments represent roughly £155m of the proceeds raised, which implies further acquisitions will be made as the company targets a 50% debt-to-asset ratio.

Build-to-rent

Elswhere, investors should also take a look at the PRS REIT (LSE: PRSR), which is particularly noteworthy because of its strategy of investing in newly constructed build-to-rent homes. Investing in newly-built private rented housing allows PRS to acquire new properties at a slight discount to the potential sale price on completion via forward funding of new developments.

As such, PRS is expected to earn a higher net initial yield when compared to purchasing existing housing stock. On the downside, however, operational risks may sometimes be greater due to potential construction problems and dilapidations, which could affect both rents and resale values.

PRS has completed just over 400 homes since June 2017 and has committed a further £437m for new developments, with around 1,300 new homes under construction. Under its current strategy, it will utilise roughly one-third of its equity to purchase completed assets, with the remainder used for forward fund developments within the REIT itself.

The company is targeting a 6% annual dividend yield and net total shareholder returns of at least 10% per annum, based on its IPO price of 100p.

The post Forget buy-to-let! These residential REITs target returns of 8% plus appeared first on The Motley Fool UK.

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• As Endeavour Mining shares jump 7% on Q1 results, is this a way into the gold rush?
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Jack Tang has no position in any 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.