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Why I’m still avoiding buy-to-let in 2020

Rupert Hargreaves
Piggy bank on floorboards

According to high-end estate agents Savills, over the next five years, rents in the buy-to-let sector will increase by around 15.4% on average across the UK. London will see a better performance, according to the study, with rents growing roughly 18.8%, but this growth is unlikely to start in 2020.

For this year, the property experts are forecasting rental growth in London of just 2%.

These mixed forecasts are just one of the reasons why I am avoiding buy-to-let property in 2020. While there are some green shoots in the market for landlords, on the whole, I think the property market looks much less appealing than stocks and shares.

As well as a lack of rental growth, I am also concerned about the regulations the government has recently introduced that have piled the pressure on landlords.

What’s more, the Conservatives also promised to bring an end to no-fault evictions in their manifesto, as well as introducing longer tenancies. However, so far, these rules have not become law and we will have to wait to see if Boris Johnson and his team make good on these promises before considering the impact the changes might have.

A great alternative

An excellent alternative for buy-to-let property is real estate investment trusts (REITs). These publicly traded vehicles invest in property around the UK and offer investors exposure to properties that would be impossible to buy as an individual, such as hospitals, supermarkets and even theme parks.

REITs offer exposure to property without you having to do any extra hard work. Experienced management teams are responsible for the day-to-day management of the properties, and these investment trusts are usually able to invest in the best quality assets before they hit the public markets.

Some trusts offer dividend yields of 5% or more and can be owned inside a Stocks and Shares ISA, so there is no further tax liability to pay.

Capital growth

The one downside of REITs is that they tend to underperform the rest of the market as capital performance is linked to property values, which don’t tend to rise rapidly.

If it is capital growth you’re after, growth stocks such as Wizz Air could be much better investments. Wizz is planning to triple the size of its fleet over the next eight years, which could lead to a tripling in earnings per share, and a subsequent threefold increase in the airline’s stock price.

Other companies, such as Reckitt Benckiser offer exposure to the fast-growing and defensive consumer goods market. The other advantage these companies have over buy-to-let property is international diversification, which should protect earnings growth against any Brexit-inspired economic disruption over the next 12 months.

So, those are some of the reasons why I’m still avoiding buy-to-let property in 2020. I think the stock market could provide much better returns with a lower initial investment and international diversification.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns Wizz Air. 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 2020