The headwinds facing buy-to-let landlords have been well reported recently. And house prices remain stubbornly high compared to the average wage, making it even harder to get into the buy-to-let game in the first place.
The risks are high and the potential for profit has reduced compared to previous periods. For me, a buy-to-let strategy isn’t worth the trouble, but that doesn’t mean I’d turn my back on the property market altogether.
Property-backed alternatives I think there are many fine opportunities to invest in property-backed shares on the London stock market, which could be an easier way to prosper from the underlying property market. I’d first consider buying shares in big FTSE 100 property REITs that pay chunky dividends such as Land Securities Group and British Land Company, which are both yielding around 5%.
But there are some great dividends available from the housebuilding firms in the main index too. Persimmon (LON:PSN) yields 10%, Barratt Developments (LON:BDEV) 7% and Taylor Wimpey (LON:TW) around 9%. If you believe property prices will hold up and the demand for new housing will stay robust, those companies could be worth further investigation.
If I wanted to invest just in property-related shares I’d also consider the several property-backed firms listed in the FTSE 250 and FTSE Small-Cap indices. However, one thing that affects all property-related markets from time to time is the potential for a cyclical downturn.
Reducing the risks from cyclicality If you owned a buy-to-let property, the value of your building would likely fall in a property bear market. And it’s the same for property-backed shares, the share price could go down as the value of the underlying assets falls in the case of property-owning companies, or if demand for new housing eases in the case of the housebuilding firms.
I reckon the aim of all investing, whether buy-to-let or share-based, is to compound your money. So, I’d also be willing – eager, in fact – to extend my search beyond the property market and property-backed investments. Many shares on the London stock market are backed by businesses that are not as cyclical as the property market. There are some big, sustainable dividend yields available – ideal to help with the process of compounding.
For example, staying in the main FTSE 100 index, I’d consider investing in smoking products manufacturer Imperial Tobacco with its 8% yield, and pharmaceutical giant AstraZeneca yielding 3.5%. Both companies produce fast-moving consumer goods with a high degree of customer loyalty and repeat purchasing. The cash generation from such set-ups can be consistent and predictable, which is ideal for keeping those dividend payments going. My guess is that both companies’ shares could prove resilient in any wider macroeconomic slowdown that may affect the property market.
Another approach would be to invest in the stock market itself by buying into a FTSE 100 accumulation tracker fund or one that follows another index. You’ll still get a decent yield, which will automatically be reinvested for you to set your investment on the road to compounding. If you forget buy-to-let, there are, indeed, many attractive options available instead.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended AstraZeneca, British Land Co, Imperial Brands (LON:IMB), and Landsec. 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