Buy-to-let is historically a popular choice among Britons wanting to invest cash to help fund their retirement. But is now the right time to plunge into the rental property market?
House prices have been rising steadily since the financial crisis. They’re close to record highs in many areas of the country. The rules and regulations faced by buy-to-let landlords are also getting tougher, increasing costs.
That’s not all. Between April 2017 and April 2020, changes to the rules on mortgage tax relief mean that many landlords will face rising tax bills. One final headwind is that many investors expect interest rates to increase as well.
A long-term opportunity?
To make money from buy-to-let, your rental income needs to leave you with a profit after tax, mortgage payments, property costs and void periods between tenants. High property prices make this more difficult, as my colleague Kevin Godbold recently explained.
Today I want to look at two property companies operating in areas that are seeing strong growth. The first of these is property developer Watkin Jones Group (LSE: WJG). This £540m AIM-listed company operates in the build-to-rent and student accommodation markets.
The company’s revenue rose by 20% to £363m last year, while its adjusted pre-tax profit rose by 15.7% to £50.1m. Net cash almost doubled to £80.2m, up from £41m at the end of 2017. Shareholders will enjoy a 15% dividend rise to 7.6p per share.
Watkins’ management expects to continue to benefit from favourable market conditions. It says that students are increasingly choosing purpose-built student accommodation instead of older university halls or shared houses. According to today’s results, another potential boost is that the number of 18-year-olds in the UK is expected to rise from 2021.
Fund manager Neil Woodford is Watkin Jones’ second-largest shareholder, with a 12.9% holding. I can see why Mr Woodford is attracted to this business. Today’s results have left the stock trading on a price/earnings ratio of 13.5 with a dividend yield of 3.5%. I think that these shares could easily beat buy-to-let from current levels.
A FTSE 100 star
Over the last five years, shares in warehouse specialist Segro (LSE: SGRO) have risen by 80%. The FTSE 100 index to which it belongs has gained just 4% over the same period.
This outperformance has been driven by strong demand and rising values for so-called big box warehouses. These are the huge buildings needed by large retailers, logistics groups and other firms to cope with the growth in online retail, and the supply requirements of modern industry.
One problem for potential tenants is that acquiring the large, well-located areas of land required to build new warehouses can be difficult and slow. Such is the demand for property of this type that 71% of Segro’s projects under development have been leased ahead of completion.
My only concern is that this sector may eventually overheat. I’m not sure how likely this is. The two key growth trends identified by Segro boss David Sleath are e-commerce and urbanisation. Neither seems likely to slow down just yet, from what I can see.
The shares trade at a slight premium to their last-reported book value of 603p, and offer a 2019 forecast dividend yield of 3.1%. This stock isn’t cheap. But I believe this business is likely to outperform buy-to-let. I’d be happy to own the shares.