For years, I dreamed of investing in a buy-to-let. But now I think the best way of making money from UK property is to invest in Barratt (LSE: BDEV) shares and other FTSE 100 housebuiders.
That may seem an odd claim, given how poorly the sector has performed since crashing after the Brexit vote in June 2016. Yet I have found Barratt Developments, Persimmon and Taylor Wimpey hard to resist. All three have traded at rock-bottom valuations for years while offering some of the highest yields on the index.
Construction time again
The post-Brexit crash never happened. House prices actually rose during the pandemic, helped by the stamp duty holiday and the ‘race for space’ among lockdown-crazy flat owners.
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Former chancellor Kwasi Kwarteng almost sunk the market when mortgage rates rocketed past 6.5% last autumn after his mini-budget, but Jeremy Hunt restored order. With five-year fixed-rate mortgages hovering around 4% today, prices have stabilised, according to Nationwide, or are even climbing slightly, if you believe Halifax.
The Barratt share price has climbed 33.16% in the last six months. That’s despite management cutting its dividend by 9% in February and reporting a sharp drop in forward sales, from 15,736 in 2022 to 10,854 this year. That’s a difference of £2.67bn. Over 12 months, the shares are 2.16% higher.
Last month, HSBC upgraded a string of housebuilders, arguing that a downturn in the housing market and low return on invested capital are more than priced into their shares. Which is what I’ve been saying for ages.
Despite its share price surge, Barratt still looks cheap trading at 6.1 times earnings. That rises to nine times for forward earnings. The forecast yield and has fallen slightly, but still stands at 6.7%, covered twice by earnings.
That’s a very decent rate of income, but dividends are not guaranteed and Barratt isn’t the only housebuilder to cut its shareholder payout. Persimmon, which I bought six months ago, recently slashed its dividend in half. Today, it yields 4.33% (still higher than the yield on a London flat).
Both income and growth
Buying a housebuilder like Barratt is so much easier than setting up as a buy-to-let landlord. I can buy shares in seconds from my online platform, paying only a £5.99 trading fee and 0.5% stamp duty.
Even after finding a bricks and mortar property, I would expect to wait three or four months to complete, at least. I would also have to shell out for surveys, stamp duty (including that 3% investor surcharge), mortgage arrangement fees, refurbishment costs, and so on.
Then I would have to find tenants, chase them for rent, replace them when they leave, or fight them in the courts if they don’t. Plus my income and capital growth would be taxable, in contrast to shares bought in an ISA.
Buy-to-let isn’t all bad. The recent dip could offer investors a cut-price buying opportunity and rents have hit record levels, boosting income.
Equally, Barratt has risks. Labour and material costs have risen sharply over the last 18 months, and inflation isn’t beaten yet. House prices or stock markets could crash. The slow-rolling US banking crisis could upend everything.
Yet I still think Barratt shares offer me a far superior way of generating income and growth than a buy-to-let.
