The first is FTSE 100 housebuilder Barratt Developments (LSE: BDEV). The second is FTSE 250 real estate investment trust Derwent London (LSE: DLN).

Both stocks have run-up in today’s trading. While Barratt Developments is up by almost 2%, making it among the biggest FTSE 100 gainers, Derwent London is up by almost 1%. 

Barratt Developments posts strong sales numbers

Barratt Developments reported 4.7% higher forward sales volumes than at the same time last year. The number was even higher at 9.8% in terms of value. 

I think this bodes well for the company, which had already shown a robust half-year performance. For the first half of its financial year, ending December 31, the company reported a 10% revenue increase and even a 1.7% increase in pre-tax profits compared to the year before. 

With its share price still below pre-market crash levels of March last year, I think it could continue to rise further.

Derwent london reports pre-tax profits

Derwent London also posted a robust update today. Some 93% of its rents have been collected for March, some of the strongest levels since the start of the pandemic. And also positive, vacancy rates are at a low 2.3%.

And it has reduced its net debt to £905m, while it has a strong liquidity position as well. This would be good news at all times, but at present, it’s even more so and these are prudent moves that can hold Derwent London in good stead. And it’s especially important as the company fell into losses last year, which gives it less wriggle room if a slowdown happened again.

Policies drive real estate market

A slowdown could still happen, of course, and it could hurt both companies. But I think that for now, the odds are in favour of property stocks. Just today, the Bank of England has said that the UK is set for its strongest growth since the Second World War. This should keep property markets buoyant. 

Like Barratt Developments, Derwent London is yet to reach the share price highs of early 2020. But given the latest update and overall optimism, I think it could happen soon. 

With the good though, comes the bad. In this case, for both firms, it would be the withdrawal of the stamp duty waiver and interest rates being likely to rise eventually. Supportive policies have played a big role in holding up real estate markets, so I reckon that some impact would be felt on the stocks as the situation changes. 

My takeaway

I think it’s quite likely that any impact would be short-term in nature, however. Despite the withdrawal of supportive policies, there could be a natural demand rise as the economy takes off. I feel that the property market may well have managed to stave off a slowdown that accompanies a weak economy.

With that in mind, I’m bullish on both stocks at their current prices.  

Riding the employment rebound

I think buying UK recruitment shares could be a good way to play the economic recovery. There’s been a string of positive trading updates coming out of the sector in recent weeks. And the strong market conditions of recent months remain very much alive, at least if latest industry data is to be believed.

According to recruiter Morgan McKinley, there was a 70% quarter-on-quarter increase in job vacancies in the City of London in March.

One UK recruiter on my shares radar today is Hays (LSE: HAS). City analysts think annual earnings here will rebound 133% in the financial year to June 2022. This compares to the 50% drop forecast for the outgoing fiscal period.

And it’s a bright reading that leaves this UK reopening share trading on a forward price-to-earnings growth (PEG) ratio of just 0.2. This is well below the benchmark of 1, which suggests a stock that might be undervalued by the market.

A word of warning, however. Successful Covid-19 vaccine rollouts bode well for Hays and its UK and US marketplaces, but the fresh wave of infections rolling across Europe could well scupper any predicted profits rebound later in the year.

Another great UK property share?

At first glance, Derwent London (LSE: DLN) might also appear to be an attractive reopening stock to buy right now. Sure, it trades on a high forward price-to-earnings (P/E) ratio of around 36 times today. But City analysts think the office space provider might be on the road to solid and sustained earnings growth as workers in the UK return to cities en masse. Current forecasts suggest bottom-line rises of 6% and 10% in 2021 and 2022 respectively.

The capital’s historical role as a trading hub means Derwent London could well continue to enjoy strong demand for its properties. Indeed, latest research from estate agency Knight Frank and think tank New London Architecture showed an 11% year-on-year increase in 2020 planning permissions for high-rise buildings in the capital.

This data suggests developers are expecting demand for office space in London to remain strong over the long term.  However, I’m yet to be convinced.

Signs of a Brexit-related corporate exodus to European cities is one reason I fear for property companies like Derwent London. Also, there are indications that companies both large and small are going to embrace flexible working practices more fervently in a post-pandemic landscape. And that could have huge ramifications for UK property shares like this in the long term.

For this reason, I’d much rather buy other UK reopening shares today.

Lockdown measures the world over have, of course, limited our opportunities to use cash. But even among those physical retailers that have remained open, consumers’ use of coins and notes has severely declined amid fears of cross-contamination.

Cash demand is crashing

Data just released from ATM operator Link shows the extent of the drop off. It says cash withdrawals in the UK crashed 60% in the month to 27 April as shoppers rushed to contactless and digital payment methods instead. And it’s a pan-global phenomenon that some predict will run and run.

Link, for example, says 51% of people it has spoken to say they will use payment cards more in future. UK Finance has previously predicted debit cards would account for half of all transactions by 2024. The Covid-19 crisis since then means these estimates will likely require significant changes.

De La Rue’s shares are cheap, as illustrated by its forward earnings multiple of below 3 times. But this is a share whose long-term future is cloaked with too much risk. I’d rather invest my money elsewhere.

Is office demand set to tank?

Derwent London (LSE: DLN), on the other hand, isn’t a share that trades on rock-bottom P/E ratios. Following recent forecast downgrades, it actually trades on a reading of above 27 times for 2020. This reading is, in my opinion, hardly appropriate for a share which faces an uncertain future following the Covid-19 outbreak.

Lockdown measures have already played havoc with this major provider of serviced office spaces in the UK capital. In early April, it said it had received less than three-quarters (73%) of rents for the March quarter. This is down from 98% in the same 2019 period. On top of this, Derwent London said it has ceased construction work on three sites and deferred spending and decisions on future building projects.

Quarantine measures have been rolled back in major territories more recently, of course. But even if this continues, the property giant faces a revenues crash as a traumatic recession envelops the world economy.

It’s likely the company’s profit expectations beyond the short-to-medium term will disappoint too. The lockdown measures have boosted the so-called work-from-home culture and raised employee expectations of such ‘perks’. It’s a phenomenon that many businesses all over the globe may be eager to embrace, not just to reduce costs, but to cushion themselves from the impact of another possible pandemic later down the line.

Both Derwent London and De La Rue have sunk in value during the past three months. The former is down almost a third while the money producer has crashed around 60%. This recent weakness clearly doesn’t provide a decent dip-buying opportunity though. I’d happily invest my hard-earned cash elsewhere.

The good news is there are other ways of benefiting from the growth and income opportunities available from the UK property market. Better still, you can invest free of tax, via your Stocks and Shares ISA allowance.

Bellway

UK housebuilders were hit particularly hard by the EU referendum result. House price growth has slowed, but there has been no sell-off, and while London has been slowing, other regions have compensated by playing catch-up.

FTSE 250 listed developer Bellway (LSE: BWY) builds traditional family housing across the UK, and apartments within outer London boroughs, giving it a good geographical spread. Its share price is trading 85% higher than five years ago, helped by recent positive results, which saw house completions climb 5% to hit a record 10,892, with profit before tax up 3.4% to £662.6m.

The £4bn group has a strong balance sheet with net cash of £201.2m, which also gives it capacity for future investment. Yet at the same time, it has a wide safety margin, trading at just 7.1 times forward earnings, while offering a forecast yield of 4.5%, covered 3.1 times.

Demand for property has been underpinned by the Help to Buy equity loan scheme, and could take a knock when that is limited to first-time buyers in 2021, then ends altogether in 2023. Brexit and the election also create some uncertainty but you could say that about almost every stock right now.

Derwent London

Alternatively, you could invest in commercial property instead, through the shares of Derwent London (LSE: DLN), which targets niche urban areas within central London. This £4bn FTSE 250-listed real estate investment trust (REIT) owns and runs an investment portfolio of 5.7m sq ft, of which 98% is located right in the centre of the capital, specifically the West End and the areas bordering the City of London.

It is well placed to benefit from the arrival of Crossrail with over 70% of its buildings within 800 metres of a station on the forthcoming route, and it has also shrugged off the slowdown in London’s property market and Brexit concerns. Earlier this month, it reported a 46% jump in lettings to £33.5m, and a drop in the vacancy rate down to 0.6%.

London is still a massive global draw and Derwent should benefit if we get some kind of Brexit resolution, and international money flows back into the country. Its share price is up more than 20% in the last three months and this could be a good way to play returning confidence.

The loan-to-value (LTV) ratio on its properties was just 16.4% at the end of September, and it has now increased its annual dividend for 26 consecutive years. It is currently trading on a low price-to-book value, while the share price trades at a discount of 8.33% compared to net asset value. Derwent London looks a strong long-term buy-and-hold, particularly for income seekers.

Since the start of the year, the Diageo (LSE: DGE) share price has been able to beat the FTSE 100. It has gained 10%, and could generate further outperformance of the wider index. It appears to have a strong growth outlook and a sound strategy. As such, it could be worth buying alongside a company that released results on Tuesday, and which could also generate high long-term returns.

Improving prospects

The stock in question is real estate investment trust (REIT) Derwent London (LSE: DLN). It released full-year results which showed a rise in net property and other income of 12.8% to £185.9m. Its earnings per share moved 20% higher to 113.1p, while its net asset value (NAV) per share gained 1.6% to 3,776p.

The company reported strong demand for central London office space, with it being able to outperform the wider market through its development activities. Its portfolio value increased by 2.2% to £5.2bn, with it experiencing positive trading conditions despite the continued uncertainty posed by Brexit.

Looking ahead, Derwent London is forecast to post a rise in earnings of 5% in the current year. With its shares trading on a price-to-book (P/B) ratio of 0.9, it appears to offer a wide margin of safety. As such, now could be the right time to buy it after the stock has risen by 15% since the turn of the year.

Improving growth prospects

The growth potential of Diageo appears to be highly impressive. The company’s products are focused on the premium segment, which is forecast to become increasingly affordable across the global economy over the coming years. This may increase demand for the beverages company’s products at a time when it is in the process of becoming increasingly efficient as it follows a rationalisation and cost-cutting programme.

Having risen by 10% this year, the stock now has a price-to-earnings (P/E) ratio of around 24. This is clearly a high valuation, but the dependable growth of the business may help to justify it. Should there be a global economic slowdown, its performance may be hit less hard than some cyclical shares, since it operates in a relatively defensive industry where it has a strong competitive position.

Therefore, further outperformance of the FTSE 100 could be ahead for Diageo. Its economic moat appears to be wide as a result of the range of brands which it owns, while it operates across a wide variety of geographies. Therefore, from a risk/reward perspective, it could have significant appeal versus the rest of the FTSE 100 in the long run. As such, now could be the right time to buy it for the long term.

Commercial properties are also regarded as higher-risk investments, due to typically higher average vacancy rates, which can make it difficult for ordinary investors to rely on a single property investment for income. Instead, most investors would probably be better off pooling their money with other investors, via a property investment trust or a REIT, as this will allow you to benefit from added scale, diversification and the skill of the fund manager in looking after your investments.

Keeping that in mind, here are three commercial property investments that deserve a closer look.

Diversified portfolio

With total assets of nearly £1.5bn, the F&C Commercial Property Trust (LSE: FCPT) is one of the UK’s largest actively managed closed-ended companies investing directly in commercial property.

F&C aims to provide investors with an attractive level of income from a diversified portfolio of prime commercial property assets. The managers invest principally in three commercial property sectors: office — retail and industrial — focusing on investments that they believe will generate a combination of long-term growth in capital and income for shareholders.

The managers have a strong track record of delivering robust returns to its shareholders, after having generated a net asset value (NAV) total return of 82% over the past five years. There’s great income appeal too, with the company paying monthly dividends that currently annualise at 6p per share, giving prospective investors a yield of 4.2%.

Less retail exposure

Looking ahead, it may be a good idea to find a property company with less retail property exposure. With bricks and mortar retailers continuing to cede ground to online sellers, investors are becoming more sceptical towards retail property valuations.

With that in mind, Picton Property Income (LSE: PCTN) may be a better pick. It has just 23% of assets weighted towards retail and leisure, compared to 43% for the F&C Commercial Property Trust. And in place of the company’s lower exposure to retail, Picton is tilted more heavily towards the more resilient industrial and warehousing sector, which accounts for 41% of total assets.

Unsurprisingly, its portfolio construction has served it well of late. The company’s total return for the 12 months to 30 June 2018 was 14.2%, which was roughly double the return achieved by the F&C trust over the same period.

REITs

The REIT space is another good place for investors to look right now, as a number of property giants are trading at big discounts to the value of their underlying assets.

For example, shares in London-focused Derwent London (LSE: DLN) trade at a 21% discount to NAV, for no other reason aside from the weak investor sentiment towards office space in the capital. Analysts reckon the office market in the capital is particularly vulnerable to a ‘no-deal’ Brexit outcome, given the city’s outsized exposure to financial services.

Nonetheless, Derwent London continues to deliver steady earnings growth, with underlying earnings up 14% in the first half of 2018, to 51.8p per share. And on the back of this, the company raised its interim dividend by 10%, to 19.1p per share.

Today the company showcased its strengths by announcing that it will pay a special dividend to investors on top of hiking its ordinary payout for 2017, thanks to a strong year for London property. 

Special dividend 

The trust saw its asset value per share rise by 4.6% in the year to 3,716p, from 3,551p a year before. Net rental income rose 10% to £161.1m and Derwent achieved a total property return of 8%, ahead of the MSCI IPD Central London Offices Quarterly Index of 7.1%. Its property vacancy rate at the end of December was just 1.3%. 

Off the back of these results, management has declared a final dividend of 42.4p, up 10% year-on-year, taking its total dividend for the year to 59.7p, up 14% on the year before. In addition to hiking its regular payout, the group also announced a special dividend of 75p per share paid out due to “several value-enhancing transactions” announced back in February 2017. 

Commenting on these figures, CEO John Burns said: “The London office market continues to be resilient with good occupier and investment demand.” And based on this outlook, I believe that this real estate investment trust is a great asset for any investor who wants to protect their portfolio from further market declines. 

Protecting your portfolio

Property, particularly London property, is an extremely defensive asset, and the returns are not correlated to equities, indicating that if markets fall, Derwent shareholders should continue to profit. 

Based on today’s figures from the company, the shares are currently trading at a price-to-book value of 0.8 and support a dividend yield (including the special distribution) of 4.4%. 

Another London property play that I believe can protect your portfolio from additional market declines is Great Portland Estates (LSE: GPOR). Like Derwent, Great Portland wants to return extra cash to investors this year after a successful 2017. The company is planning a special dividend of 94p per share later this year following the £306m sale of commercial properties. Management has decided to go down this route as the group is extremely well capitalised with a pro forma loan to value ratio of only 7%. 

A lack of debt, coupled with a balance sheet stuffed full of London property freeholds only reinforces my view that this is a great defensive investment. However, despite the company’s defensive nature, it trades at a discount to book value per share with the last reported net asset value being 813p.

At the time of writing, this implies that the stock is trading at a price-to-book value of 0.8, although this calculation does not include any adjustments from the return of value planned. 

The special dividend alone is equivalent to a dividend yield of just under 15% for 2017.

Strong results helped LondonMetric to deliver a 3% increase in its dividends to 3.7p per share for the first half, with dividend cover up slightly from 112% in the same period last year, to 114%. Assuming a similar increase in its dividend for the remainder of the year, which would be in line with the consensus analysts’ forecasts, shares in the REIT trade on a prospective yield of 4.3%.

Demand continues to grow

LondonMetric’s property portfolio has held up better than most in the sector, helped by its focus of distribution space. Despite ongoing Brexit uncertainties, occupational demand for distribution space, both large and small, remains strong, due to the shift happening between retail and online shopping. At the same time, the company’s largely de-risked development programme has also added to income growth and valuation gains.

Looking ahead, I’m very excited about LondonMetric dividend growth potential as its future earnings prospects are underpinned by the favourable sector outlook and its attractive short cycle of new developments. It has seven properties under construction right now, with a further four in the pipeline, which could potentially add more than 1.5m sq ft to its portfolio over the next two years.

Discount

Value investors looking for an opportunity to buy into a quality REIT at a discount should probably instead consider Derwent London (LSE: DLN).

The London office-focused REIT is attractively valued, with shares trading at a 24% discount to its net asset value (NAV), despite continuing to deliver robust earnings growth and having one of most attractive development pipelines in the central London office space.

Of course, investors are concerned about the impact of Brexit, but much of Derwent London’s portfolio is in the West End or the Tech Belt in central London — locations that are typically less exposed to the financial services industry. They are also invested in assets that have low capital values and modest rents, with good medium-term potential for improvement.

And so far, Derwent London’s rents and property valuations have held up well — like-for-like net rental income increased by 5.6% in the first-half of 2017, while NAV per share increased 0.5% in 2016 to 3,551p. Further gains are likely on the successful execution of two projects for delivery in 2019. What’s more, the vacancy rate also remains very low, after falling slightly from 1.9% in June to 1.4% at the end of September.

The stock has a regular dividend yield of just 2.2% this year, but City analysts expect its forward-looking yield will climb to 2.4% by 2018.

With this in mind, let’s look at two examples — both of which reported interim numbers to the market this morning — and ask whether either can help you achieve financial independence.

Massive demand

A huge rise in demand for warehouse space from blue-chip companies over the last few years has driven many investors to build positions in Tritax Big Box (LSE: BBOX). The £2bn cap trust owns, manages and develops logistics facilities in the UK and counts Tesco, Unilever and Marks & Spencer among its tenants.

Over the first six months of the year, the trust’s net asset value (NAV) grew by 3.3% to 133.3p per share. Pre-tax profits soared by just under 50% to £80.53m helping it to outperform the return generated by the benchmark UK Global Real Estate Index. 

At £2.1bn, Tritax’s total portfolio is now valued just under 11% more than it was at the end of 2016. During the interim period, it acquired three new sites and two new customers. The trust now owns 38 assets (covering almost 20m sq ft of space), all of which were let or pre-let and income producing during six months to the end of June.

Looking ahead, I see no reason why it shouldn’t continue to benefit from the explosion in online retail and wholeheartedly agree with the trust’s Fund Manager, Colin Godfrey, that the development of this logistics market “remains in its infancy“.

So, how about those dividends? Today, Tritax declared a payout of 3.2p — 3.2% higher than that declared for the previous six-month period — and remains on track to hit a target of 6.4p per share for the full year. At today’s share price, this would equate to a yield of around 4.3%. 

Despite trading at a premium (149p), I think Tritax would be a great purchase for any investor committed to achieving financial freedom through dividend reinvestment over the medium-to-long term. 

Vulnerable to Brexit?

Also reporting interim results today was Derwent London (LSE: DLN) which owns and manages a £4.8bn portfolio of roughly 6.2m sq ft in the capital’s West End and City borders.

Over the six-month period to the end of June, its NAV per share rose 0.9% to 3,582p. Net rental income increased by 9.2% to almost £80m compared to the same period in 2016 with the vacancy rate of its portfolio falling from 2.6% to 1.9%.

Thanks to £500m of disposals or forward sales above book values so far this year, Derwent claims to have a “robust” financial position. Net debt fell by 19% over the interim period. The trust also boasts cash and undrawn facilities of up to £446m.

Despite all this, the shares aren’t for me.

While today’s 25% hike to the dividend is undeniably attractive, Derwent’s forecast 2.4% yield for the year is far lower than that offered by Tritax. Thanks to its focus on owning assets in the capital, the former also presents as a riskier buy in my opinion, particularly as we crawl ever closer to our scheduled departure from the EU in March 2019. With so much political uncertainty abound, the current valuation of 32 times forward earnings just feels too rich.

Strategy improvements

Reporting on Wednesday was real estate investment trust (REIT) Workspace (LSE: WKP). The company announced positive results for the full year, with net rental income rising by 6.9%. This helped to push adjusted trading profit 15.5% higher, with the company’s strategy being a key reason for its improving financial performance.

Demand across a wide range of industries in London is gradually moving towards the type of personalised and flexible terms which Workspace offers. More businesses are prioritising connectivity and highly designed space, which has been the direction in which Workspace has sought to move in recent years. The business has a pipeline of refurbishments and redevelopments which are expected to deliver over 1m sq. ft. of new and upgraded space over the next three years. This could act as a catalyst on the company’s profitability over the medium term.

In terms of the company’s profit outlook, Workspace is forecast to record a rise in its bottom line of 21% in the current financial year, followed by further growth of 9% next year. With a price-to-earnings growth (PEG) ratio of just 1.2, it seems to offer a strong investment case for the long term.

Growth potential

Also offering upbeat growth forecasts is fellow REIT Derwent London (LSE: DLN). It is expected to report a rise in its bottom line of 16% in the current year, followed by growth of 12% next year. This follows a four-year period of growth which saw its earnings rise at an annualised rate of 11.5%. Therefore, it appears as though the company has a resilient business model which could perform well in what remains an uncertain environment for UK property.

As well as strong growth credentials, Derwent London also offers a wide margin of safety. It has a PEG ratio of only 1.9 which, given its track record of growth, seems to be a fair price to pay.

Additionally, its dividend growth potential remains high. It is due to raise dividends per share by 21% over the next two years, which is expected to put its shares on a forward dividend yield of 2.4%. Since dividends are still expected to be covered 1.6 times by profit in 2018, more above-inflation growth could be on the cards. This mix of high growth, fair value and improving income potential could help Derwent London to beat the FTSE 100 over the medium term.