While buy-to-let has been a popular investment class in recent decades, its risk/reward ratio seems to be becoming increasingly unfavourable. Risks to the UK economy and high residential property prices mean that it could endure a challenging period in future.
In contrast, the growth opportunity for commercial property shares such as Landsec (LSE: LAND) and British Land (LSE: BLND) seems to be encouraging. Despite this, they trade on low valuations and, with diverse portfolios, they may be better protected from a challenging UK economic outlook than a buy-to-let property.
As such, now could be the right time to avoid buy-to-let and instead buy into the two FTSE 100 REITs.
Diversity
Due to the scale of costs involved in buy-to-let investing, in terms of the size of deposit which is required, few private landlords have a range of properties in their portfolio. In some cases, it may be made up of a handful of properties, or less. As such, there is a lack of diversity – especially since many of those properties are likely to be in the same area. This means that they are more susceptible to local risks which could impact negatively on their rental growth and demand.
In contrast, British Land and Land Securities have huge portfolios which include a variety of office and retail properties. This could help to protect them from the potential risks which the UK economy faces at the present time.
Simplicity
As well as the cost of buying a buy-to-let property, the process of doing so is cumbersome. It takes weeks or even months to purchase a property, which can be a challenging and uncertain time for the buyer. Once purchased, finding tenants can be costly and time-consuming, with void periods often longer than a landlord would like them to be. Maintenance and repairs can be expensive, while there is always the risk that a tenant fails to pay their rent. Managing a buy-to-let property is therefore challenging and at times, extremely stressful.
British Land and Landsec provide investors with the opportunity to gain exposure to the UK commercial property industry with the click of a mouse. Buying and selling their shares is very straightforward, with online share dealing making it a simple task. Liquidity is high for both stocks, which means that if an investor requires their capital in a short space of time, then it can be reached easily. Therefore, the overall experience of owning the two investment trusts could be a lot more pleasant than having a buy-to-let property.
Valuation
While residential property prices are at or near their highest-ever level compared to average incomes, British Land and Landsec trade on relatively low valuations. For example, the two stocks have price-to-book (P/B) ratios of just 0.6 apiece. This suggests that investors are expecting a significant fall in their property valuations, which could move their risk/reward ratios further in an investor’s favour.