Buy-to-let may not be the attractive investment it once was but there are other ways to invest in property, particularly amid the perennial housing shortage.
The UK government has regularly failed to hit its target of building 300,000 homes a year and while this once benefited buy-to-let landlords who could charge high rents due to the lack of stock, tax clampdowns and extra regulations have reduced the lure of property investing.
Landlords have been hit with high buy-to-let mortgage rates and restrictions on mortgage interest relief, while rental growth has slowed amid the cost of living crisis.
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But while landlords may be exiting the sector or at least not adding to their portfolios, the housing shortage continues.
This presents an investment opportunity beyond just buy-to-let.
Investors could take a different approach by investing in the housing shortage through the stock market.
“It is well known that the UK has an enduring housing shortage and it has done for decades,” says John Moore, senior investment manager at RBC Brewin Dolphin.
“For the most part, the problem is a simple case of supply-demand imbalance, but it has become a political hot potato in the build up to the next election as it becomes a key focus for both parties.”
Rather than investing through buy-to-let, Moore suggests backing the companies actively working to address the housing shortage – such as build-to-rent providers, housebuilders, and the ancillary services they need – providing a property-like yield without the hassle of being a landlord.
Here are some ways to invest in solving the housing shortage beyond buy-to-let.
The private rental sector
Rental growth may be slowing but demand for rental property remains high.
Moore highlights the PRS REIT, which invests in high-quality new-build family homes for the private rental market.
“It has agreed a series of joint ventures with local authorities and has scale and credibility in the niche it has developed for itself,” he says.
“Even though it is one of the scale players in the sector, it only manages 5,000 units, which is a drop in the ocean of a 300,000 per year new homes target – so there is huge room for growth.”
The investment trust currently trades at a discount to net asset value (NAV) of 37.3% and offers a yield of more than 5%.
Another option is Grainger, which designs, builds, develops, owns and operates rental properties.
It’s share price has been volatile in recent years amid high levels of debt but the stock is up 5.2% over the past year and has grown 5.78% on a five-year basis.
Its dividend yield is around 2.5%.
“The share price has been a bit all over the place through its history, but it is a strong, asset-backed, independent business,” adds Moore.
“With a portfolio of around 10,000 PRS homes, it has the most scale of any listed provider with a good runway for expansion.”
Back the builders
Housebuilders have seen profits and share prices fall over the past year after being hit by the end of the Help to Buy scheme as well as higher material costs, falling property values and reduced demand.
Lower inflation and frozen interest rates, as well as proposed planning reforms by the government to encourage development on brownfield sites, could help the market and get builders building again.
Moore suggests Vistry, which he says is “at the centre of the rented housebuilding side of the issue.”
Vistry’s share price is up 24.3% on a one-year basis but is down 4.99% over five years, while it has a dividend yield of 5.46%.
“Vistry is increasingly becoming an asset-light, joint venture-focussed operator, as it seeks to manage risk in what can be a tricky business,” he says.
“There has been a lot of movement in Vistry’s share price since interest rates picked up – even by the sector’s standards. But it should be in line to benefit as greater efforts are made to reform the planning system and provide more affordable housing, while offering a yield of almost 6% in the meantime.”
There are risks though if house prices fall drastically and demand shrinks, plus the Competition and Markets Authority (CMA) this week launched an investigation into some of the UK’s largest housebuilders concerning information sharing between firms which it suggested could be keeping prices high.
This includes brands such as Vistry as well as Persimmon, Taylor Wimpey and Berkeley Group.
Despite this, John Choong, senior equity research analyst at InvestingReviews, suggests Persimmon is well-positioned to generate "meaningful returns" over the medium term.
Even though the developer was demoted from Britain’s main index last year, it has since made a swift return to the FTSE 100 thanks to declining mortgage rates since the summer.
This has driven demand for housing back up, and consequently, Persimmon's share price.
Its share price is down 5% annually but up 31% over the past six months.
“Unlike most of its competitors, the York-based builder is beginning to vertically integrate is supply chain through acquisitions of Space4 and TopHat, to name a couple,” he says.
“These moves serve to reduce costs and lead times, thereby allowing for higher margins and volumes over time. Thus, although profits having declined by approximately two thirds in 2023, a recovery over the next couple of years to 2021 levels is likely to spark a resurgence in its share price, as investors price in higher profits.”
Choong also suggests Taylor Wimpey is worth considering, arguing that it is more insulated from a CMA fine and economic shocks as it caters for a more affluent customer base.
It also has a decent dividend yield of 7%, Choong says, “which makes it one of our top passive income picks.”
Additionally, Charlie Huggins, manager of the quality shares Portfolio at Wealth Club, says Berkeley Group is a good option as it is “significantly more exposed to London than the other listed builders, where the housing shortage is most acute.”
It has a unique business model, he says, as it is the only listed housebuilder able to deliver large, complex urban regeneration projects at scale.
“The complexity of these projects reduces competition and means Berkeley can deliver higher profit margins and returns than its peers,” he says.
Berkeley Group’s share price is up 11% annually and by 9.14% over five years, while its dividend yield is 2.77%.
Support the supply chain
Rather than individual builders, you could also back the suppliers.
Cement and ready-mix concrete supplier CRH has seen its share price rise almost 60% annually and by 155% over five years.
“Brands like Tarmac and Blue Circle are key parts of the construction supply chain and CRH will also benefit from similar international drivers too,” adds Moore.
“The dividend yield on CRH is lower than average at around 2% but the company offers growth potential as a consolidator of smaller, fragmented operators in addition to the benefits of its capital investment programme.”
Another option is builders’ merchants and material supply company Travis Perkins.
Its share price has plummeted by 45% over the past five years but Moore says it should be among the beneficiaries of any pick up in housebuilding activity, “with investors receiving a dividend yield of close to 5% in the interim.”
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