Demand for rental property is rising. But a growing number of buy-to-let landlords are exiting the business, according to my colleague Royston Wild.
It’s easy to see why. Landlord costs are rising. Mortgage tax relief is being cut. And the outlook for the housing market is uncertain, despite high house prices.
I believe there are much better opportunities in the stock market. Today, I want to highlight one stock I think could be the best single way to profit from property.
A global player
International real estate advisor Savills (LSE: SVS) is no ordinary high street estate agent. Last year, its revenue rose by 10% to £1,761m, generating an underlying pre-tax profit of £143.7m. In my view, this business has three features which could make it a best-buy opportunity for property investors.
One attraction is the group’s geographic diversity. About 38% of this revenue came from the UK, with a further 33% from the Asia Pacific region. The remainder was split between North America and Europe and the Middle East. This diversity means profits should hold up quite well in the event of a domestic downturn.
A second point is that the group operates retail and commercial property markets, as well as in residential property. So sales volumes aren’t dependent on one single sector of the market.
Finally, Savills also offers a range of so-called non-transactional services such as investment management and property management. These don’t depend on property sales, so they generate income even during quieter periods.
A 1,300% winner
Long-term investors have made a lot of money from Savills. The shares have risen by 1,300% over the last 20 years. That’s an average growth rate of about 14% per year, well above the wider market.
Although the dividend was scaled back during the financial crisis, the current dividend of 31.2p per share is 440% more than the 5.75p payout in 1999.
Chairman Nicholas Ferguson has warned of an uncertain outlook for 2019. But results for the year are still expected to be in line with market forecasts. These price the stock at 12 times forecast earnings, with a 3.6% dividend yield.
I think Savills looks a decent buy at this level. I see this as a business to buy for the long term, with a view to averaging down during the next property downturn.
An alternative property play
Another property stock that’s impressed me is AIM-listed Watkin Jones (LSE: WJG). This £565m firm specialises in developing and managing build-to-rent developments and student accommodation.
Both types of property are in strong demand from institutional investors. Earlier this week the company announced that it had pre-sold a 599-bed student development in Wembley for £90m, even though it won’t be ready for use until 2021.
Once it’s complete, Watkin Jones will manage the property for the new owners, generating a further income from this project.
In my view, businesses like this look more attractive than some housebuilders and much more attractive than buy-to-let. Last year, saw the firm report a 20% increase in revenue and a 26% increase in pre-tax profit. Although earnings growth is expected to slow this year, I think the 3.7% yield provides a good starting point for investors. I’d keep buying.