One of the biggest things that puts me off buying a property to let it out is the single-investment risk. I don’t have enough capital to buy and own multiple properties, so all my eggs would probably be in just one or two baskets.
That’s why I’m so keen on owning shares in property companies instead, such as the FTSE 250’s Grainger (LSE: GRI), which describes itself as “the UK’s largest listed residential landlord.” If I buy shares in Grainger, my investment will be backed by thousands of properties so I will have achieved instant real estate diversification. Meanwhile, today’s half-year results from the firm suggest that buying shares in it could be a good idea for me.
Good figures
Compared to the equivalent period the year before, net rental income rose 33%, much of which came from the firm’s December acquisition of GRIP, which is a Private Rented Sector (PRS) portfolio of around 1,700 homes in London. But underlying like-for-like rental income grew by 3.7% too and profit before tax came in 7% higher. The directors showed their satisfaction and confidence in the outlook by increasing the interim dividend by 10%.
And the dividend has been a great success story for some time — up more than 180% over the past five years — which I see as an attractive rate of growth. Chief executive Helen Gordon explained in the report that Grainger’s strategy is to invest in “high quality” new rental homes for the mid-market in UK cities. The firm has 8,400 rental homes and on top of that, around 8,200 new homes are in the development pipeline. Gordon reckons the aim is to enhance shareholder returns “by delivering a step change in our net rental income and thereby support strong dividend growth.”
The acquisition of GRIP and the properties coming through from the development pipeline should lead to a more than doubling of rental income “over the coming years,” and the company expects that to lead to further “strong” growth in the dividend for shareholders.
A positive outlook
The outlook is positive with the firm insisting that the investment case remains strong, “with growing positive structural drivers.” One trend, interestingly, is the receding competition from private buy-to-let landlords as they continue to exit the market. Grainger is in a “leading position” to benefit from the trends in the market, according to the company.
With the share price close to 264p, the price-to-book ratio runs just below two and the forward-looking dividend yield is about 2.6% for next year. Although the valuation doesn’t put the shares in the bargain bin, I think the firm’s growth strategy is encouraging. The anticipated growth in the dividend is attractive to me and I think the company has earned its rating. As long as the firm keeps expanding, I don’t think the rating will decline soon. I’m tempted to pick up a few of the shares for the long haul.