Why bother with buy-to-let when you could own this promising property share?

Piggy bank next to a financial report
Piggy bank next to a financial report

Buy-to-let investing has been getting bad press recently. In several ways, it really does look like the party could be over. Chief among my concerns is that the tax regime has been altered in recent years, with the apparent motive of discouraging buy-to-let 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.

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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.