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Buy-to-let returns have crashed! I’d rather buy this property stock’s 5%-plus dividend yields


Royston Wild April 2019

Illustration of bull and bear

If latest research on the buy-to-let market is anything to go by, it can be suggested those more-determined landlords hanging onto their rental properties may have been better off selling out and deploying their cash elsewhere.

In a recent report, property investment specialist BondMason revealed returns for private landlords have slowed to a crawl over the past few fiscal periods. In the tax year to April 2017, average returns fell to just 7.2%, down from 13.7% the year before, ending a track record of annual rises that ran into double-digit percentages.

And things have got even worse since then, slowing to 6.7% in fiscal 2017/2018 and deteriorating to 2.1% last year.

Buy-to-let exodus?

BondMason is tipping things to get even worse too, as property owners increasingly struggle to square a circle and balance rental income with increasing running costs and the loss of tax relief.

In particular, BondMason put the stepped reduction in mortgage interest relief firmly in its crosshairs, rules that will see landlords restricted to claiming a basic rate of income tax of 20% on their mortgage interest costs from next year while still having to pay the full tax rate on rental income.

“In some cases, landlords will have seen their tax bills double or even treble over the last few years,” chief executive Stephen Findlay commented before predicting: “I would not be surprised to see many private landlords making no income or even a loss next year as this change takes effect.

“This may lead to more and more landlords thinking again about their buy to let investment portfolios,” he added.

A better investment

I’m not about to disagree with Findlay. Given the government’s struggles to plug the supply and demand gap in the housing market, steps to increase regulation and diminish investor returns are only likely to become more numerous, exacerbating the exodus of buy-to-let investors.

Because of this, I for one am much happier to spend any extra capital I have on stocks, and there’s plenty of great companies for those seeking access to the property market more specifically to dial into.
Take Inland Homes (LSE: INL). This land-trading-firm-turned-housebuilder is in great shape to ride the homes shortage that’s driving sales of newbuild properties. It’s why both earnings and dividends are expected by City analysts to keep rising though the next couple of years, at least.

Latest trading details underlined why the number crunchers are so optimistic, with the AIM-listed business confirming in March that “demand for new homes continues to significantly outstrip supply” in spite of continued political and economic uncertainty. And through its medium-term goal of building 1,000 homesteads in high-demand areas in Southern England, it’s well-placed to capitalise on this fertile trading environment.

As a result of bright City forecasts, Inland carries big yields of 4.3% and 5.2% for this year and next. What’s more, the construction giant is scandalously cheap based on current forecasts too, as reflected by its forward P/E ratio of just 7.8 times. Can buy-to-let seriously be considered a better investment that this? Not a chance,  in my opinion. I for one would be much happier to spend my cash on this housebuilding hero.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Inland Homes. 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


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