Alternatives To UK Buy-to-let: Grainger And Daejan

7th Dec '15 by Fat Prophets

6 comments 8111 reads

The Conservative government has introduced tax changes that have made UK buy-to-let investment less attractive. Further moves are likely given the pressure from voters that are trying to get onto the housing ladder. It is therefore worth considering listed alternatives to buy-to-let such as Granger and Daejan.

UK residential property has been a fantastic investment over the last couple of decades. This is particularly the case in high demand and supply-constrained cities that have attracted international buyers.

A flat in a city like London is part of a monopoly because there is a limited amount of land in the city centre. The UK is itself land constrained and as such residential property has been resilient and generated strong long-term returns.

This backdrop has encouraged investors to turn towards buy-to-let property and away from equities. The shift is understandable given that the FTSE 100 is currently trading below the level it reached back in 2000.

An attraction of buy-to-let is that it solves the “principal agent” problem because investors can control the asset themselves. Buy-to-let is also one of the only areas that an individual can obtain significant debt finance.

However, buy-to-let investment can mean a lack of diversification and high transaction costs. For a highly mortgaged property there is also the risk of negative equity and investors must be mindful of the obligations to tenants.

In terms of the financial side and rental yields have fallen, due to strong house price gains, and UK interest rates are likely to rise soon. The recent tax changes may therefore tip the balance away from buy-to-let investment.

Against this backdrop it is worth evaluating the listed alternatives to buy-to-let investment. Stock market listed vehicles are certainly less hassle to own and can be bought and sold more easily.

Grainger: The UK’s largest listed specialist landlord

Grainger describes itself as the UK’s largest listed specialist residential landlord and has a market value of around £1bn.Two-thirds of the group’s real estate portfolio by value is made up of UK residential property.

The company is set to increase this focus when the sale of its German real estate assets completes.Grainger is also increasing its emphasis on the private rented sector (PRS) and developing a number of build-to-rent schemes.

Looking at Grainger’s wholly owned real estate and at September 2015 the proportion in reversionary property, by market value, was 72%.Market rented assets…

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gus 1065

7th Dec '15

You could add Mountview Estates (LON:MTVW) to the peer group of corporate players in the sector. A good write up from vegpatch on the 26th November.

Gus.

Andrew L

8th Dec '15

Gus 1065 - thanks for that I haven't looked at Mountview Estates closely. A bit more complex, smaller in size and at a premium to its NAV. But I understand the premium is understated. I think a similar model to Grainger as it focuses on reversionary assets as well. I'll have a look.

Whitbyview

3rd Jan '16

Interesting article - thank you. I wonder if I can ask an incredibly 'stupid question'? If grainger is at a discount to NAV then how can the Stockopedia P/B currently be 1.75? I thought initially this was because the NAV was based on vacant prices but then found Daejan P/B was < 1, so am now just confused! Something seems inconsistent here. Told you it was a silly question but any help gratefully received :)

Hi Whitbyview.

No such thing as a stupid question - just sometimes you might get a dumb answer!

I defer to ratioinvestor who wrote the original article with regard to the specifics on Grainger. As a general comment, to get a better handle on this ratio you need to look into the accounting policies of the underlying company. This is especially key for companies with a significant property or other realisable fixed asset base (such as an investment company's holding of shares). For example, property can often be shown in the accounts at either "cost" or "appraised market value". If a company owns a factory purchased for say £1m 25 years ago this might now be worth many times the original amount, thus the choice of accounting policy might materially understate the real economic position. For the companies in this article which have a large proportion of their assets in tenanted properties purchased many years ago the difference between book and fair market value is very significant and will have a marked impact on ratios such as P/B, P/NAV etc.

If you look at the vegpatch analysis on Mountview Estates (LON:MTVW) referred to in my post above, you will see a good analysis of the point and by extension a good, considered opinion on why the shares are "cheap".

Gus.

Thanks very much for the reply, Gus. Reading the other post and messages does indeed help. I guess this is a lesson for me in my new use of Stockopedia ... They can only report what the companies state and if companies use a different standard or benchmark, this is clearly going to skew the figures quoted and the consequent ranks etc. Learnt something today - thank you!

31st Jan '16

whitbyview - a good question. Grainger I think is a bit difficult due to the reversionary property. So the book value of this maybe with tenants. However, when it becomes vacant it becomes more valuable and this is the value that Grainger calculates its NNNAV from. The difference between Gross and Net Net asset value is that the latter factors in taxes in any sales of assets (capital gains). Grainger does sell reversionary property when it becomes vacant. So the NNNAV (triple net asset value) seems like the best figure to go for. I haven't tried to tie that up to what the group reports book value in the accounts as.

Alternatives to UK buy-to-let: Grainger and Daejan

Grainger: The UK’s largest listed specialist landlord

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Fat Prophets

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