While buy-to-let properties could produce high returns for investors over the long run, tax changes and additional regulations may mean that the sector loses its appeal to a large degree.
As such, individuals who wish to capitalise on the growth potential on offer within the wider property sector may be better off buying FTSE 100 property stocks.
At the present time there are a number of real estate investment trusts (REITs) and housebuilders that appear to offer favourable risk/reward ratios.
As a result, now could be the right time to switch from buy-to-let properties to listed property stocks.
Tax changes such as an additional 3% stamp duty levied on second-home purchases and the inability of some investors to offset mortgage interest against rental income could reduce the returns that are available on buy-to-lets over the long run.
Furthermore, regulatory changes to mortgages, such as the amount of rental cover on interest payments that is required, means that obtaining finance for a buy-to-let has become more challenging in recent years. Alongside this, there is the possibility that management fees placed on landlords may rise due to tenancy fees being banned earlier this year.
Listed property companies, meanwhile, appear to offer a relatively simple means of investing in the wider industry. REITs, for example, provide a diverse range of assets for an investor. At the present time, there are a number of REITs that trade significantly below their net asset value. This could mean that they offer wide margins of safety, which may lead to higher returns in the long run.
Likewise, housebuilders appear to be relatively unpopular stocks at the present time. A number of FTSE 350-listed housebuilders have reported robust levels of demand for new homes, with this trend having the potential to continue over the long run due to a supply shortage. With many offering yields that are well in excess of those achievable in a number of regions of the UK through a buy-to-let investment, they may produce higher returns than purchasing property directly in the coming years.
As well as the potential to generate higher after-tax returns when compared to buy-to-let investments, listed property companies may also offer lower risks. As mentioned, REITs own a wide range of properties. Having multiple REITs and housebuilders within a portfolio would provide a level of diversity that all but the largest of landlords may struggle to achieve.
Since the UK economy faces an uncertain outlook at the present time, it may be prudent to diversify to a greater extent in the coming years. Doing so could reduce the potential for losses, with the stock market offering a significantly greater opportunity to achieve this at a low cost when compared to undertaking buy-to-lets. As such, from both risk and reward perspectives, FTSE 100 property stocks appear to be more attractive than buy-to-let properties.
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Peter Stephens 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.
Motley Fool UK 2019