There have always been risks involved in property investment. For example, house prices don’t always go up, so a loss of capital is always possible. There are also risks from a tenant not paying rent on time, or at all, while void periods and the cost of maintenance can eat into profit for buy-to-let investors.
Now though, there are a number of additional threats facing the industry. Tax changes mean that mortgage interest costs cannot be offset against income for many property owners, which could lead to reduced profits and cash flow. Stamp duty has been increased for second homes, while it’s becoming more challenging to obtain a buy-to-let mortgage, due to more demanding affordability criteria.
As such, now could be the right time to focus instead on property-related shares in the FTSE 100 and FTSE 250. They may offer less risk due to their increased diversity, as well as greater liquidity. And with their resilience potentially being higher than many buy-to-let investments, the risk/reward ratio may be relatively impressive over the long run.
Resilient growth
Two real estate investment trusts (REITs) which could offer long-term growth potential are Shaftesbury (LSE: SHB) and Great Portland Estates (LSE: GPOR). Both companies are focused on London, and especially the West End. They have decided to focus on what’s a relatively small area because of its track record of resilient performance during more challenging economic periods. It’s also usually seen more robust market values than many other parts of the UK. With Brexit coming up, this could prove to be a useful ally for property investors.
The West End, of course, also offers strong growth prospects. Crossrail is due to open in the coming months, and this is expected to increase the number of visitors to the area. This may lead to increased demand for retail space, while the availability of property in the locality remains low as a result of strict planning laws. This could mean that demand growth outstrips supply growth, thereby leading to relatively strong market values.
Valuations
Given the potential risks from Brexit and the uncertainty it appears to have caused, Great Portland Estates and Shaftesbury seem to offer relatively wide margins of safety at the present time. The two stocks trade on price-to-book (P/B) ratios of 0.85 and 1.05, respectively. This suggests that they offer excellent value for money, and could deliver impressive capital growth over the coming years. And with both companies having a wide range of properties, they may come with less risk than buy-to-let investments.
As such, now could be the right time to focus on listed property companies, rather than buy-to-lets. Tax changes, mortgage availability and affordability issues among first-time buyers in particular could make the latter less appealing. Meanwhile, the former may deliver strong total returns, as well as lower risks, over the long term.