While buy-to-let has proved popular in the past for a wide range of investors, today there appears to be a better means of making money from the property market.
Real estate investment trusts (REITs) provide significantly greater diversity than a buy-to-let, which could reduce risk for many landlords. They also offer wide margins of safety in many cases, while their income returns could be higher than a buy-to-let in many parts of the UK.
As such, now could be the right time to pivot from buy-to-lets to REITs, with the FTSE 100 and FTSE 250 offering a wide range of opportunities for long-term investors.
Diversity
Many buy-to-let investors have small portfolios. They may even contain just one property from which they aim to generate a passive income, or a retirement income. While this has proven to be a worthwhile means of generating a second income in the past, it could become more challenging in future.
Factors such as regulatory changes and uncertainty for parts of the UK economy may mean there are longer void periods, as well as a higher chance of rent failing to be paid on time, over the coming years.
As such, having a diverse portfolio could become increasingly important. With REITs, it’s possible to buy shares in one company that has exposure to a vast range of properties in a wide range of locations. Some REITs have exposure to retail, offices and residential, thereby further reducing their reliance on one sector. As a result, they could offer less risk than being a landlord.
Return potential
With house prices being high compared to incomes in many parts of the country, the potential for buy-to-let capital growth could be limited. Tax changes, such as a stamp duty surcharge, could mean the scope to produce the returns of the last decade are more limited over the coming years.
By contrast, a number of FTSE 350-listed REITs currently trade below net asset value. This means investors have the opportunity to buy them while they appear to offer excellent value for money, with some large-cap REITs having price-to-book (P/B) ratios as low as 0.6. This means they could more than double in price and still trade below net asset value.
With there being REITs exposed to the fast-growing warehouse segment, which is benefitting from growing demand for deliveries from online retailing, there are also growth opportunities within the industry. In fact, their growth rate could be well ahead of house prices at a time when interest rate rises are forecast over the medium term.
Takeaway
Now could be the right time to refocus capital on REITs, rather than buy-to-let, within a Stocks and Shares ISA. Doing so could reduce risk through a higher degree of diversity, while offering an impressive return outlook as a result of their low valuations and long-term growth potential.