Buy-to-let has generated fantastic returns for investors over the past few decades, but it looks as if returns from this asset class are going to slow over the medium term. With this being the case, I think property stocks could be a much better addition to your investment portfolio.
Today, I’m looking to property stocks that I believe have the potential to produce better returns than buy-to-let over the long term, with little-to-no effort on your part.
Online shopping LondonMetric Property (LSE: LMP) is focused on finding the best retail assets in the UK. These aren’t traditional retail assets, however. The company is looking for urban logistics properties, where retailers prepare and send out orders to customers and shops. As online shopping has boomed, demand for these assets has exploded.
According to the company’s half-year results published today, the value of its urban logistics properties increased by 4.5% for the six months ending 30 September, at a time when the rest of the property industry is seeing asset values stagnate. Net rental income increased by 5.8% year-on-year.
LondonMetric’s property portfolio also has extremely attractive economics. For example, during the six months to the end of September, the company invested £46.5m in new properties with average lease lengths of 19 years, and 62% of income benefiting from contractual rental uplifts. You don’t get this kind of predictability from buy-to-let investing. Only 6% of leases in the property portfolio are coming up for renewal in the next three years.
With such attractive economics, it’s no surprise that shares in LondonMetric are currently changing hands at a slight premium to the net asset value of 172p. I think this is a price worth paying for the income security the underlying property portfolio provides.
The stock currently supports a dividend yield of 4.5%. And with the majority of the property portfolio leased on contracts with rental uplifts, I think this distribution should continue to grow steadily for many years.
Big boxes FTSE 250-listed Tritax Big Box (LSE: BBOX) operates a similar business model to LondonMetric. The enterprise owns so-called big boxes, which are extensive logistics facilities leased on long leaseholds to companies like Amazon (NASDAQ:AMZN).
From an income perspective, Tritax right now appears to be a better buy than LondonMetric. The dividend yield stands at 4.8%, and just like its peer, the distribution should rise in the medium term as rents tick higher.
Given the increasing importance of e-commerce to the world’s biggest retailers and consumer goods manufacturers, Tritax looks to me to be one of the best property investments on the market right now.
What’s more, the firm’s balance sheet is relatively debt free, with a loan-to-value ratio of just 25% at the end of June. This gives the company plenty of financial flexibility and scope to expand its portfolio, which it has been doing in recent months. The latest addition is a £89.3m logistics facility in Corby.
It might not be the most exciting business, but if you’re looking for a steady, predictable income stream, Tritax won’t let you down, in my opinion.
Rupert Hargreaves owns no share mentioned. John Mackey, CEO of Whole Foods Market (NASDAQ:WFM), an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tritax Big Box REIT. 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.