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Why I’d buy this FTSE 100 housebuilder over a buy-to-let

Robert Faulkner
Models of houses on top of pound coins

Buy-to-let rent prices have fallen for the first time in a decade despite increasing costs for landlords resulting from government pressure. These include the rise in stamp duty on second homes which is an extra 3% on top of the standard stamp duty. There has also been a reduction in the tax relief on the interest on mortgage payments.

Landlord struggles

This won’t change much for most buy-to-let landlords, but it will have a massive impact on those in the higher tax bracket once the transition has finished in 2020. In future they will pay 20% tax on income that would have been eligible for tax relief, as well as 40% tax on the rest of the profit. Landlords will also pay capital gains tax on any rise in the value of a rental property that they sell, further reducing any potential profit. These changes are in addition to a number of other reasons why BTL can be a precarious asset class.

Some of the fall in rent prices has been attributed to a reduction in demand from EU citizens. This is likely to continue when we do get around to leaving the EU. However I suspect the government’s schemes to build new homes may add to this trend in future as the amount of new-builds slowly increases. 

A better option

Instead of investing in property, I’d be more interested in putting my money into perennially undervalued housebuilder, Taylor Wimpey  (LSE:TW). There are a number of reasons to avoid this sector right now, including its reliance on the controversial Help-to-Buy scheme and ongoing Brexit concerns. However I think these risks are built into the valuation.

Taylor Wimpey has a very cheap price-to-earnings ratio (P/E) of just 8.9 and a huge dividend of 9.9%. It also has over £700m in cash, which means the dividend is safe for the present. In addition to this, it also has a lot of assets invested as working capital. While this is not as useful as cash as it can’t be utilised, Taylor Wimpey’s entire assets divided by the shares equates to 98.5p per share. The share price is currently 185p, so this means less than half of the value of the shares is related to the future performance of the company. Bear in mind though that this is a rough measure, and not all assets are as easy to liquidate as cash.

Cheap as houses

The concern with construction companies is that there could be a cyclical downturn which could be very damaging if the additional risks of Brexit and a possible end to Help-to-Buy become a reality. This has led to the share price lagging behind the performance of the company which has seen profits more than double in the past six years. The P/E has fallen from nearly 20 to less than 10 over the same period.

Even considering the risks, I think Taylor Wimpey looks like a good long-term investment if you are an income investor. The 10% dividend is huge and is supported by a mountain of cash.

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RobertFaulkner1 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