For many people, investing in property may seem prohibitively expensive at the moment. After all, the price to earnings ratio of residential property in London is 12.9. This makes engaging in buy-to-let investments which have the aim of beating inflation rather difficult.
It’s a similar story in commercial property. It remains relatively expensive, and this could lead many investors to turn to other assets. However, by investing in property through Real Estate Investment Trusts (REITs), it is possible to generate a high yield as well as capital growth due to low valuations across the sector.
While residential and commercial property prices may seem high, the reality is that they could move significantly upwards over the long run. Brexit may create a degree of uncertainty, but thus far it has had only a limited effect on prices. One reason for this is the continued strong performance of the UK economy. It has been helped by a loose monetary policy which is set to remain in place over the medium term. This could provide a stimulus for the wider economy and lead to continued growth in asset prices, including those of commercial property.
Although inflation dropped to 2.6% from 2.9% last month, it continues to create difficulties for income investors seeking to obtain a real income return. While the yields on residential and commercial properties have been compressed in recent years due to their price rises, it is possible to generate a high dividend yield from a REIT such as British Land (LON:BLND) or Land Securities (LON:LAND).
British Land and Land Securities have prospective dividend yields of 4.9% and 3.9% respectively
British Land and Land Securities have prospective dividend yields of 4.9% and 3.9% respectively. Both are 130bps+ ahead of CPI, and are covered 1.2x and 1.3x respectively by their earnings. Judging by the high demand for retail and office premises in the UK (particularly in the south east), both companies could deliver rising profitability over the medium term. This could lead to higher payouts to investors, since REITs typically do not need to reinvest a high proportion of their profit each year.
As well as the potential for higher property valuations as discussed earlier, British Land and Land Securities may generate capital growth for investors because they trade below their NAVs. For example, British Land has a P/B ratio of 0.68, while Land Securities has a P/B ratio of 0.71. Both of the companies’ share prices could rise 50% and still not be overvalued when compared to their net assets.
In fact, British Land believes its shares are a much more compelling investment opportunity than commercial property assets at the moment. That’s why it announced a £300 million share buyback for the current year, in lieu of further investment in new assets.
With low valuations, promising income returns and the potential for higher property prices further down the line, REITs such as British Land and Land Securities could be a means of beating inflation through property investment.
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