Getting exposure to the UK residential property sector remains a brilliant idea, in my opinion. Investors can choose to do so by investing in buy-to-let. I’ve taken another route and bought property stocks to boost my wealth.
I own shares in high-dividend FTSE 100 housebuilders Barratt Developments, Taylor Wimpey and Persimmon. I also own a stake in FTSE 250 brick manufacturer Ibstock to capitalise on surging demand for new homes.
Why wouldn’t I? Home prices in Britain continue to soar at an astonishing pace and private rents are also booming. But despite this, I’m not keen on buy-to-let for my own investment portfolio.
Costly business
This is because recent rule changes have created a drain on landlord profits. The scrapping of tax relief on items like mortgage interest, coupled with hefty costs related to increased regulation, have caused an exodus of buy-to-let investors. A jump in mortgage rates more recently has also increased the strain.
As a result, the number of landlords out there is shrinking. Estate agency body Propertymark says that the average number of homes per estate agent branch plunged to 15.6 in March 2022. This was down from 30 properties three years earlier.
As I say, rents in the UK are exploding due to a shortage of available properties. The average rent in August rose 8.5% year-on-year, according to insurance provider HomeLet.
But as Adam Male, chief revenue officer for online lettings agent Mashroom, recently told the Financial Times: “Making a profit on the rent is almost impossible if you are a new entrant to the market without a large cash deposit.”
Soaring house prices
So while buy-to-let is becoming increasingly stressful, I think those who have cash to invest will lose out by not getting exposure to property in some form. As well as those soaring rents, property prices across much of the UK continue to soar.
Average home prices grew at 19-year highs in July, according to latest ONS data. The return of Stamp Duty a year earlier flattered these numbers. But a 15.5% annual rise is still indicative of a rock-solid homes market where demand is outstripping supply.
It’s why I’ve boosted my exposure to the housebuilding sector in 2022 by buying shares in Persimmon. This particular share celebrated “strong demand” and “robust forward sales” in its latest financial update a month ago. And newsflow has been positive across the industry.
16.5% dividend yields!
Rising interest rates pose a threat to these businesses. It’s possible that higher affordability costs will dampen sales of their new-build properties.
But it’s my opinion that the threat is reflected by the housebuilders’ rock-bottom valuations. Persimmon, Barratt and Taylor Wimpey all trade on forward P/E ratios of below 6 times.
Combined with their gigantic dividend yields, I think these high-dividend shares are brilliant buys and much better investments than buy-to-let. Forward yields for these housebuilders range between 8.9% and 16.5%.