Why I’d diversify into this property-backed share before committing to buy-to-let

This interesting property-backed share has defensive qualities and a reasonable valuation.

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There’s no getting away from it. If you commit to a buy-to-let property the chances are high that you’ll need to fork out a large percentage of your capital to get started. You’ll either need a big deposit or find the entire purchase price of the property.

Then you’ll face the toe-curlingly large costs that come with purchasing a property. And don’t even get me started on the risks and uncertainties that you’ll face once you are up and running.

But the biggest problem of all is that you’ll be massively overweight in just one investment. Unless, of course, you have millions to start with and can diversify across many properties. But the reality is probably that you don’t have enough money and that’s why you’re investing in the first place.

A solution to the diversity problem

However, there’s a neat solution to the diversification problem in the many property-backed shares available on the London stock exchange. By buying shares of property companies instead of buy-to-let, you can outsource the property management part of the equation (and all the hassle) to the directors of the underlying company behind a share. Also, because the underlying property businesses are well funded, they can invest in several properties, which means that your shares in the company are backed by a diversified portfolio, which is very hard to achieve with buy-to-let.

One interesting stock market-listed company reported its full-year results today is MedicX Fund (LSE: MXF), which owns 165 purpose-built primary healthcare properties across the UK and Ireland, and the annual figures are good. Adjusted earnings per share rose 11.4% year-on-year and the net asset value increased by almost 7% to 81.8p, which compares well with the current share price around 76p, suggesting decent value. Over the year, the amount of rent received went up 8.6% and the firm said in the report that just over 89% of the rent roll is paid directly by the National Health Service (NHS), Irish General practitioners (GPs) or the Health and Safety Executive (HSE), which implies that the rent is reliable and enduring.

Defensive qualities

The property portfolio was revalued nearly 19% higher during the period at almost £807m, and the net yield is running at almost 5%, which I reckon compares well to buy-to-let these days. Looking forward, the directors said in the report the firm has a “strong” pipeline of around £144m worth of acquisition opportunities, including projects with a value of £69m in “solicitors’ hands.  

The directors argue in the report that MedicX has defensive qualities and is unlikely to be affected by Brexit. The firm, they said, invests in a sector with “ever-increasing demand driven by growing, ageing populations.”  None of that will change whatever our future relationship looks like with the European Union. I think the argument is persuasive and that’s why MedicX would sit well in a portfolio with other property-backed investments on the stock market.

The forward dividend yield runs close to 5%, which looks attractive, and I think the share is well worth your consideration, particularly if you are interested in investing in the property sector.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Kevin Godbold 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.

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