I reckon the buy-to-let market instinctively appeals to many people because loads of us have experience of living in, buying, selling and owning property. The property market is something that people understand.
We watch prices moving up and down by monitoring them in the local paper, on Rightmove, in estate agents’ windows and by keeping an eye on the value of our own homes. Many of us are armchair ‘experts’ when it comes to the property market, which is why when we have a bit of money to invest, we as a nation often seem to start thinking about property ownership and the buy-to-let market.
Location, location, location But it’s another one of those postcode lotteries. Rental yields vary enormously from area to area, and you may find yourself living in a region where property prices combine with poor demand characteristics to render the buy-to-let market unworthwhile.
If that proves to be the case, it could be a blessing in disguise if you’re put off the idea because being involved in a buy-to-let business can be a lot of hard work and worry. And those gross rental yields we target could soon be eaten away by ongoing maintenance and management costs, to produce a net yield that’s hardly worth getting out of bed for.
So rather than face all the uncertainty, hard work and risk of the buy-to-let market, I’d invest in a great property share focused on a robust niche market such as Empiric Student Property (LSE: ESP). As the name suggests, the firm operates as a Real Estate Investment Trust (REIT) providing student accommodation, which it describes on its website as a “robust” asset class. Indeed, the demand for UK higher education is “very healthy.”
A lucrative business I can tell straight away it’s a lucrative business because serviced lettings on the website seem to start at around £125 per week. That strikes me as pretty decent income for what is typically a single en suite room with communal shared facilities on top. But it depends on location, of course, and setting up your own buy-to-let in a promising location could be difficult. However, ESP owns well-placed student accommodation buildings in several university towns and cities, so the problem of location is solved immediately if you buy some of the firm’s shares.
Today’s half-year results report reveals revenue rose 14% compared to the equivalent period the previous year and adjusted earnings per share shot up 57%. An attractive feature of the business is its high operational gearing, which means small percentage increases in revenue lead to larger percentage increases in profits, as we are seeing here. It’s all a factor of high fixed costs. Once revenue has paid for those, its profits nearly all the way.
The net asset value notched up by 2% to 108.5p per share, and the directors held the interim dividend at last year’s level. But that’s not to be sniffed at. Today’s share price near 93p makes the firm look like good value against that net asset value, and the forward-looking dividend yield stands close to 5.4% for 2020. To me, Empiric Student Property is attractive right now.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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