Instead of investing in a buy-to-let property, I’d rather buy shares in property companies listed on the stock market.
Similarities and differences
From an investing point of view, property stocks and physical real estate share similar characteristics. For example, property prices can rise and fall with the potential to increase in value while you own a building. And shares also go up and down and have the potential to increase while you hold them.
With property, there is the opportunity to collect a yield from rental income. And with shares, we can harvest yield from the dividends. However, one big difference is the costs involved. Buying, selling and holding shares comes with relatively minor costs whereas taking on a property is an expensive undertaking. It can cost thousands to buy, sell and maintain a building.
We also have much greater liquidity with shares. Buying and selling are often as easy as making a few clicks of a computer mouse and we can convert our shares back to cash almost instantly if we choose to. However, deciding to sell a property is often the beginning of a long and difficult journey, which could result in your investment being tied up for months and even years in some cases.
Then there is the issue of diversification. If I went into buying and letting property today, even with mortgage loans, I’d struggle to diversify my investments across more than a few buildings. But when I buy shares in a property company, often my investment is spread across many underlying buildings.
Targeting commercial property in the regions
Palace Capital (LSE: PCA), for example, recently converted to a real estate investment trust (REIT) and has a portfolio worth around £276m diversified across regional commercial property. That’s another great thing about property shares, you can buy several of them, each targeting a particular area of the market. In that respect, Palace Capital’s focus on commercial property outside London in other regions is useful.
The company aims to invest in areas with “thriving local economies and strengthening fundamentals.” And today’s half-year results report for the period to 30 September reveals to us that compared to the equivalent period the year before, adjusted earnings per share rose 6.25%. The directors held the dividend flat and declared a net asset valuation of 391p, which compares to today’s share price of around 287p.
That discount to net asset value combines with the 6.6% dividend yield to suggest to me that the valuation is modest. But I think that situation reflects the uncertainty in the property market right now. Chief executive Neil Sinclair said in the report that the firm “stepped up” its development activity during the period. The idea is to meet the demand the company is seeing for “well located, fit-for-purpose property that delivers higher-quality income and capital growth.”
I’d be happy to buy a few of the company’s shares along with those of other diversified property companies right now.