The opportunity to generate high returns from buy-to-let properties may be less attractive than it has been in the past. Tax rises, high house prices and an uncertain economic outlook may combine to produce relatively unfavourable prospects for landlords across the UK.
As such, now could be a good time to consider switching from buy-to-let properties to buying shares in listed property-related businesses. At the present time, a number of housebuilders and listed landlords trade on low valuations, and offer a degree of diversity that may be difficult for buy-to-let investors to achieve.
With that in mind, here are two FTSE 100 property-related stocks that could deliver high returns in the long run.
Real estate investment trust (REIT) British Land (LSE: BLND) has experienced a challenging period in the past couple of years. Structural changes to the retail sector, in terms of shoppers increasingly buying goods online, mean that demand for retail units has fallen. As a result, the company is seeking to pivot towards faster-growing areas of the commercial property market, such as flexible office space, as well as residential opportunities through build-to-rent.
These changes may take time to be delivered. However, British Land seems to be making encouraging progress with them. It could lead to a stronger business that offers a more sustainable rise in rental income over the long run.
The company currently trades at a 40% discount to its net asset value. This suggests that investors have priced in the uncertain outlook for the wider commercial property sector, and that the stock could offer a wide margin of safety. As such, it may deliver improving share price performance as it implements its revised strategy.
Another FTSE 100 property-focused company that is implementing a changed strategy is housebuilder Persimmon (LSE: PSN). It is aiming to improve its customer satisfaction rates through delaying the completion of its properties in the short run. This is negatively impacting on its financial performance, but could lead to a more sustainable growth outlook for the business in the long run.
Clearly, the prospects for the company are highly dependent on government policy towards the housing market. However, there remains an undersupply of new homes that has caused demand for the company’s properties to be high over recent quarters despite an uncertain macroeconomic outlook. This trend may persist over the coming years – especially since interest rates are expected to stay at their current low levels.
Trading on a price-to-earnings (P/E) ratio of just 9.4, Persimmon seems to offer good value for money. It has a solid track record of profit growth, while its strong balance sheet suggests that it is positioned to deliver further improvements in its bottom line over the long run. Therefore, it could represent a more appealing investment opportunity than a buy-to-let property.
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Peter Stephens owns shares of British Land Co and Persimmon. The Motley Fool UK has recommended British Land Co. 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.
Motley Fool UK 2019