Buy-to-let investors really have had their backs to the wall recently.
On the plus side, rents growth has continued to pick up, reflecting a huge shortage of available rental properties. Unfortunately, increased costs mean that landlords have been unable to make the most of these increases. Indeed, recent rent hikes have simply reflected the passing on of growing expenditures onto the shoulders of tenants.
In fact, data shows that landlord returns have slowed to a crawl in recent times. And it’d be foolish to expect rampant cost growth to cool any time soon.
Recent cost changes reflect government attempts to free up homes for first-time buyers by forcing landlords out. Signs that Whitehall is failing to get near its home creation targets have only increased this speculation, too. Around 241,000 new homes were created in 2019, up annually but still a long way off the government’s target of 300,000.
Our survey says…
And I’m not alone in fearing that things could get worse for Britain’s landlords, either. A survey from Simply Business illustrates perfectly how sentiment is deteriorating across the sector.
Of 800 buy-to-let investors that it recently surveyed, the insurance broker says a whopping 26% indicate they are planning to sell one or more rental properties in 2020. Some 82% said that they wouldn’t be buying new property this year, too. Compare this to the 13% who say that they intend to expand their bricks-and-mortar portfolios.
“Landlords around the country are telling us that government reforms, tax increases, and rising rental costs are forcing them to put their investments up for sale,” says Bea Montoya, chief operating officer at Simply Business.
She adds that “ongoing political and economic uncertainty hasn’t been providing landlords with the confidence they need to stay in the market”.
8% dividend yields!
If you want to invest in property, why bother with buy-to-let? The London stock market allows you to put your money into bricks-and-mortar via a plethora of ways. Long-term share investing also doesn’t require the same level of hands-on care that landlords have to contend with.
Consider the investment case for Cairn Homes (LSE: CRN), for example. This Irish housebuilder is riding the colossal shortage of new homes in Ireland to deliver fat profits growth, as trading details released this month show.
Revenues leapt 29% in 2019 to €434m, it said, a result that pushed operating profits 28% higher to €68m. The supply and demand imbalance in the market is keeping average selling prices ticking higher (rising to €372,000 last year excluding VAT, versus €366,000 in 2018). And Cairn is turbocharging production rates to make the most of this fertile market. It registered 1,820 closed and forward sold last time.
For 2020 City analysts expect earnings at Cairn to rise 28%, leaving it trading on a rock-bottom forward price-to-earnings growth (or PEG) ratio of 0.5 times. Combine this with a monster 8% dividend yield and I reckon this is a firm that offers plenty of investor upside. I’d much rather put my money to work here than with buy-to-let.