REITO

From landlord to investor: why buy-to-let owners may be switching to stocks for a second income
Story by Mark Hartley

Housing development near Dunstable, UK

UK landlords may be considering new ways to earn a second income as rising costs and tighter regulations diminish their returns. Instead, some are looking to the stock market as a potentially more lucrative investment, or so a recent report in The Times claimed

Legislative changes also add new layers of complexity and expense, including the abolition of ‘no-fault’ evictions and stricter energy efficiency requirements.

These challenges have hit the buy-to-let market hard, with data revealing only 10% of homes purchased this year were bought by landlords — the lowest since 2007. And nearly half of them may consider selling their properties, citing unmanageable costs and regulatory burdens.

Of course, this doesn’t entirely negate the value of buy-to-let. Falling interest rates or a change in legislation could bring back profitability. Furthermore, the intrinsic value of owning physical real estate is always a bonus.

Searching for new second income avenues

Those who have made the switch cite lower maintenance, greater liquidity and long-term growth potential as key advantages over property ownership.

Everything from gold and government bonds to dividend shares and investment trusts can be placed in an ISA. And property’s not off the table — real estate investment trusts (REITs) offer an inexpensive, maintenance-free way to gain exposure to the UK real estate market.

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UK property stocks

The UK’s home to several top-performing REITs, such as LondonMetric Property, Land Securities Group and British Land. These investment vehicles are popular for their high dividend yields, often exceeding 6%.

It has a smaller yield than most, at only 4.4%, but its growth and reliability make it an attractive option. Since 2014, dividends have increased every year without fail, at an annualised rate of 7.3%.

Sadly, its price action’s less impressive. It’s down 21% in the past five years — a common theme with REITs. Since Covid, the fund’s suffered under a high-interest-rate environment — an ongoing issue. It also faces additional risks from rising vacancy rates and falling rent prices, putting pressure on margins and threatening profits.

Fortunately, things look to be improving. Since 2022, the company’s net margin has increased from -33.7% to 88%, with it turning profitable last year. Earnings per share (EPS) is expected to reach 36p this year, up from 29p in 2022.

With a low price and strong dividends, I think the stock’s worth considering for both value and income investors alike — particularly those looking for exposure to the UK property market.