There have certainly been many good years for buy-to-let investors. But I don’t think 2019 (or 2020) will be among them.

The two engines of profit for rental investors both appear to be grinding to a halt. House prices are already high and seem to be stagnant or falling in most regions of the UK. Alongside this, the costs and tax burden of being a landlord are increasing.

I think direct property ownership is best left to professionals who have the scale and financial firepower to build resilient, diversified portfolios. But I’m continuing to invest in property through listed property stocks.

Here, I want to look at two companies I believe should provide reliable long-term income and growth.

Big boxes pay well

One area where property demand is strong and seems likely to remain so is modern warehouse space. These massive ‘big box’ units are in demand to serve online retailers, supermarkets and other companies which need large-scale distribution facilities.

A number of dedicated warehouse property firms have emerged to take advantage of this trend. One of my favourites is Tritax Big Box REIT (LSE: BBOX) which owns £3.4bn of logistics property. This portfolio boasts an annual rent roll of £161m and a weighted average unexpired lease term of over 14 years.

The firm’s loan-to-value ratio was a conservative 27% at the end of 2018 and although the company is continuing to develop new sites, this is being done on a pre-let basis. That means building doesn’t go ahead until Tritax has secured a tenant, usually on a 15-20 year lease. In my view, this should restrict the downside risk for shareholders if market conditions soften.

Of course, I’m not the only investor to have spotted the attractions of this sector. Tritax stock trades roughly in line with its net asset value of 152p per share and the stock’s forecast yield of 4.6% isn’t especially high. That’s not a bargain, but is seems fair value to me. I’d be happy to buy the shares for a long-term income portfolio at this level.

Smart regional focus

London gets a lot of attention from property investors. But some industry insiders believe more attractive rental yields are available elsewhere. One company whose managers hold this view is Palace Capital (LSE: PCA), which owns and develops commercial property, primarily in regional university towns.

The firm has grown steadily since its flotation in 2013 but Neil Sinclair, Palace chief executive, says that “pricing in the market at the moment does not provide sustainable value.” As a result, he now plans to focus on maximising the potential of the PCA portfolio, rather than adding new sites.

As a potential shareholder, I welcome this focus on maximising value and cash returns. Dividend cover fell below 1x last year, and the firm’s cash generation didn’t cover its shareholder distribution. Portfolio occupancy of 87% also leaves room for improvement.

At the time of writing, the stock trades at a 33% discount to its net asset value, with a 7% dividend yield. I think this is a fair reflection of the risk and opportunity here.

The post Thinking about buy-to-let? Here’s what I’d buy instead appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. 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.

But I’m also troubled that property prices have become far less affordable than they once were, compared to the average wage in Britain. Meanwhile, we could be about to see a sustained period of rising interest rates, which could work to keep a lid on property values going forward. Maybe prices will even fall. If such a scenario plays out, it could be harder to juggle rental income and costs in order to turn a profit. Because even if you do end up with net income gains, fluctuating property values have the potential to wipe out your earnings.

Diversified commercial property portfolio

I wouldn’t want to go into the buy-to-let business now because all the effort and hassle involved could lead to an overall loss rather than a gain. I reckon the good times for buy-to-let investors are probably behind us. Instead, I’d rather invest in one of the property-backed shares listed on the London stock exchange, such as Palace Capital (LSE: PCA).

The firm has a diversified portfolio of commercial property worth around £283m in towns and cities outside London that are “characterised by thriving local economies and strengthening fundamentals.” The directors look for areas with ongoing development activity, such as urbanisation and infrastructure improvements. Chairman Stanley Davis said in today’s half-year results report that in many such locations there’s been “a significant reduction in space.” Sometimes offices are in short supply, or it could be industrial property, and the situation is likely to have been caused by the planners allowing change of use to residential, or because of a lack of speculative development. In such situations, Palace Capital finds opportunities particularly, Davis said, “in locations such as Southampton, Winchester, Newcastle and York.”

He went on to explain that the company is different from its peer group because it has created “considerable” value for shareholders by buying up other property companies rather than making direct purchases of property. Shrewdly, the firm saved “considerable” amounts on Stamp Duty Land Tax (SDLT), and enjoyed “tangible” benefits with inherent tax losses and capital allowances by going down the corporate takeover route. This is one area in which those investing in Palace Capital shares could gain a considerable advantage over taking on buy-to-let property.

Plenty of firepower left

The firm declared its net asset value (NAV) per share at 421p today, which compares well to the current share price around 296p, suggesting decent value. The directors held the quarterly dividends at 4.75p, and the yield is running at more than 6%, which looks tempting and could be an easier income to collect than trying to get it from buy-to-let. Meanwhile, ongoing trading is good with gross rental income up 29% year-on-year. The total return during the first half of the trading year came in at 4%, which the firm defines as NAV growth and dividends paid. Looking forward, net debt is low at £84m, which gives the firm plenty of firepower for further expansion. I think the firm could be well worth your further research time.

The post Why bother with buy-to-let when you could own this promising property share? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares 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.

However, the income potential of the bank remains strong. Alongside an improving strategy, this could make it a worthwhile investment opportunity. It could be worth buying alongside a FTSE 250 income stock which reported positive results on Monday.

Improving outlook

The last few years have represented a period of change for HSBC. The company has come under a significant amount of criticism from investors for its somewhat mixed financial performance. One problem it has faced is high costs at a time when many of its industry peers have been able to put measures in place such as headcount reduction in order to make their businesses more efficient.

In response, the company has decided to invest more heavily in faster-growing regions within its portfolio. As a result, it is seeking to focus a greater amount of capital across Asia, where the growth potential within the banking sector seems to be high. This could lead to a higher growth rate for the bank and may provide it with a competitive advantage versus industry peers who are focused on slower-growth markets.

Income potential

Of course, the banking sector may not be viewed as a sound place for income investors to buy shares. The financial crisis may be nearly a decade ago, but the uncertainty which it brought means that some investors may feel the chances of dividends being paid is lower than for other industries.

However, in the case of HSBC, its 5.3% dividend appears to be highly sustainable. Not only does the company have the potential to generate impressive earnings growth in future following its decision to focus on fast-growing Asia, its dividend is also due to be covered 1.4 times by profit in the current year. And with its shares trading on a price-to-earnings (P/E) ratio of 15, there seems to be further upside potential ahead for the long term.

Improving prospects

Also offering improving income prospects is FTSE 250-listed property investment company Palace Capital (LSE: PCA). It reported improving full-year results on Monday which showed that it was able to make progress with its strategy.

For example, during the year it was able to acquire its largest purchase to date. The RT Warren Portfolio helped to boost the company’s valuation to over £275m, while profit before tax moved 6% higher. This was boosted by a rise in net rental income of 22% to £14.9m, while revaluation gains and profit on disposals also made a positive impact on profitability.

With dividends rising by 3% versus the prior year, Palace Capital’s 5.5% dividend yield appears to be highly attractive. It is covered 1.1 times by adjusted profit, which suggests that it is sustainable. As a result, the stock could offer income investing potential over the long run, with a price-to-book (P/B) ratio of 0.8 indicating that it offers a wide margin of safety.

The post Why HSBC is an overlooked FTSE 100 dividend share I’d buy and hold forever appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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.

With that in mind, here are two stocks which could be worth a closer look. They have dividend growth potential as well as impressive business models for the long term.

Improving performance

Having endured a challenging number of years, the future for diversified resources company BHP Billiton (LSE: BLT) appears to be relatively bright. The company has made numerous changes to its business model in recent years that seem to have improved its sustainability and profit growth potential. For example, it has spun-off various assets into a new entity, South32. This has helped BHP Billiton to become more focused on its low-cost asset base, where it could have a competitive advantage versus a number of its industry peers.

With commodity prices having risen somewhat in recent months, the company’s profit growth prospects have improved. It is expected to record a rise in its bottom line of 13% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it could offer significant upside potential.

Dividend growth

With dividends being covered 1.6 times by profit, they appear to be highly sustainable. They could move higher if profit growth remains robust. This seems relatively likely, since the supply surplus of various commodities including oil now looks to be significantly reduced. This may mean that the prices of oil, iron ore and other commodities increase in future and lead to higher profit and dividend growth for the company over the long run.

Also offering dividend growth potential at the present time is UK property investment company Palace Capital (LSE: PCA). The company focuses on commercial property that is mainly outside London and reported positive first-half results on Monday. They showed that dividends increased by 5.6%, while the value of its property portfolio increased by 10.7%. Its average cost of debt remains relatively low at 2.9%, while its overall occupancy rate of 89% suggests that demand for commercial property remains high.

Total return potential

In the last three years, the company has increased dividends per share by around 47%. It could have scope to raise shareholder payouts yet further in future, with its outlook being relatively positive. For example, next year it is expected to increase its bottom line by around 5%. Since it trades on a price-to-book (P/B) ratio of just 1.4, it could also have capital growth potential.

With a dividend yield of 5.5%, Palace Capital could offer a high income return. As well as this, its low valuation and dividend growth potential mean it could be worth buying for the long run.

The post 2 high-growth dividend shares you might regret not buying appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in BHP Billiton. 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.

In this piece I’m going to look at two potential buys — a small-cap upstart and a big name property stock with a long pedigree.

Rapid growth

AIM-listed Palace Capital (LSE: PCA) has delivered rapid growth since its flotation in 2013. The reported value of its property portfolio has risen from around £60m in 2014 to £183.2m at the end of March.

News today suggests that this value could soon head north of £200m. Palace has announced plans for a £67.8m deal to acquire RT Warren, a property company with a £71.8m portfolio of industrial and residential properties.

Palace plans to raise £70m through a share placing to fund this deal. The group’s plan is to sell the London residential properties and focus on improving the rental yield from the commercial properties.

There are several things I like about this. The first is that by raising the whole value of the deal in fresh equity, management expects to deliver a significant drop in leverage. The group’s loan-to-value ratio is currently quite high in my view, at 43%. But if the RT Warren deal goes through as planned, this is expected to fall to less than 35%.

The second thing is that the RT Warren assets generated a rental income of £3.6m last year. This gives a rental yield of about 5%, which is below the group’s average. However, management believes a number of the new properties have the potential to deliver higher returns.

Palace’s special focus is on active management to maximise rental yields. So far, it’s been quite successful. Net asset value per share rose by 7% last year, while adjusted pre-tax profit rose by 20% to £6.7m.

The shares currently offer a yield of 5%. For small-cap income investors, they might be worth a closer look.

A 35% discount

FTSE 100 property group British Land Company (LSE: BLND) has a £13.9bn portfolio that’s focused on prime London office space, and retail centres around the UK.

Neil Woodford has been buying British Land stock for his income funds, most recently in August. And although some of Mr Woodford’s picks have come in for a lot of criticism this year, I believe this one makes sense.

The stock currently trades at a 35% discount to its net asset value of 915p, and offers a forecast dividend yield of 5.1%. British Land is well funded and the portfolio has a loan-to-value ratio of less than 30%, which seems fairly prudent.

The group doesn’t need to refinance any of its borrowings until early 2021 and has a weighted unexpired lease term of 8.3 years. Occupancy stands at about 98%.

One risk is that some of the group’s major tenants — perhaps retailers — could fall into financial distress and default on their rent payments. However, despite this possibility, I think it’s fair to say that forward visibility of earnings is pretty good.

In my view, the stock’s discount-to-book value is large enough to provide some protection against falling prices and lower rents. British Land has been on my watch list for a while. I’m certainly getting closer to making a purchase.

The post This Neil Woodford value stock is trading at a big discount appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co. 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.

Today’s interim results show that Palace’s rental income and net asset value both rose during the first half of the year. Can this performance continue? In this article, I’ll highlight some key differences between Palace and one of its larger peers.

The good news

Palace will increase its interim dividend by 29% to 9p this year, the firm said today. Based on last year’s payment of two equal dividends, this should mean that shareholders can expect a total payout of 18p this year. That’s equivalent to a yield of 5.0%.

The net value of the company’s assets rose by 1.2% to 419p per share, during the first half. This means that at the current share price of 360p, Palace stock is priced at a 15% discount to book value.

Palace’s strategy of redeveloping properties to maximise rental yields seems to be working well. Rental income rose to £7.0m during the first half, up from £5.4m during the same period last year. This equates to adjusted earnings of 10.8p per share, which puts Palace on track for full-year forecasts of 21.3p per share.

What’s worrying me

Palace Capital’s strategy is to buy properties that need a helping hand. For example, management targets properties whose owners may be in financial distress, or where occupancy levels are low.

This approach has worked well during the strong market conditions we’ve seen in recent years. But my feeling is that the firm’s strategy could be riskier if the market slows down.

Palace Capital’s portfolio has an occupancy level of just 89% and a weighted average unexpired lease term of 5.8 years. The group’s debt also has relatively short maturities — 84% of total debt must be refinanced within five years.

The short-term nature of Palace Capital’s borrowings means that its debt costs are very low at the moment. Palace has an average interest rate of just 2.9%. My concern is that this situation may be too good to last.

If Palace fails to raise occupancy levels or secure longer leases, then refinancing could be costly. If property values fall in the regions, as we’ve seen in London, then Palace’s loan-to-value ratio of 39% could also rise to a level where it would become a concern.

A safer alternative?

I think it’s worth comparing Palace Capital’s key metrics with those of a much larger, older commercial property firm. Land Securities Group (LSE: LAND) is one of the UK’s biggest listed commercial property businesses.

Shares in the group have fallen since the referendum, in part because of Land Securities’ exposure to the London market. But on the face of it, Land Securities now offers very good value at quite low risk.

Land stock currently trades at a whopping 30% discount to book value, and offers a dividend yield of 3.7%. The group’s loan-to-value ratio is just 22%, with a weighted average debt maturity of 9.0 years. Land’s properties have an average unexpired lease term of 8.9 years.

Taken together, these figures suggest to me that if you are concerned about the outlook for the market, Land Securities could offer a more attractive balance between risk and reward than Palace Capital.

The post Is small-cap Palace Capital plc the best or worst buy in the property sector? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.