Life as a buy-to-let investor could become increasingly difficult, while investing in FTSE 100 dividend stocks may become more appealing. As a result, now could be a good time for property investors to consider switching from bricks-and-mortar into large-cap income shares.
Looking ahead, challenges facing buy-to-let landlords include the prospect of slower rent growth, higher interest rates and stalling house price growth. By contrast, FTSE 100 dividend stocks appear to offer increasingly favourable income growth potential, as well as low valuations.
Rent growth While rising rents have been commonplace across the UK in the last decade, the uncertain future for the economy means that they may struggle to match their past performance. While Brexit has thus far been brushed aside in terms of its impact on figures such as employment, this has at least partly been due to a strong global economy having a positive impact on the UK.
With the US and China seemingly on course for a full-scale trade war, the outlook for the UK and world economies could come under pressure. This may mean that growth in rents slows to some degree, which could reduce the returns available on buy-to-let properties.
Interest rate rises While interest rate rises have been forecast for a number of years, Brexit-related uncertainty could mean that they take place over the medium term. With the prospects for the UK in a political and economic sense being difficult to predict at the present time, it would be unsurprising for investor confidence to deteriorate. This could lead to a weaker pound, which may lessen the need for a lower interest rate due to it providing a boost to UK exporters and the wider economy.
In tandem, a weak pound may also cause inflation to move higher. This could increase the prospect of an interest rate rise. A higher interest rate could increase the cost of debt servicing for landlords, and cause their cash flow to come under pressure.
House price growth With the cost of houses when compared to average incomes being towards the upper end of their historic range, property is becoming increasingly unaffordable. This may mean that house price growth is more limited in future, with this perhaps being a natural event due to the cyclicality of the industry.
The end product of slower house price growth may be reduced profit for buy-to-let landlords. Although the last decade has produced high total returns, history shows that the property market ebbs and flows. It could now produce a rather disappointing period in terms of house price growth.
FTSE 100 dividend stocks With the FTSE 100 having a dividend yield of over 4%, it seems to offer good value for money. Many of its members are expected to produce above-inflation dividend growth over the medium term, which could mean that its income investing potential is more attractive than that of buy-to-let properties.
Although a rising interest rate may also hurt share price growth prospects across the index, it may benefit sectors such as banking. Therefore, buying a diverse range of FTSE 100 dividend stocks could be a good idea at a time when property investing is becoming increasingly challenging.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019