The U.K. real estate sector could be one of the most attractive places to invest going into the second half of the year, in my opinion. According to data from Her Majesty's Land Registry, average house prices in the U.K. increased by 12.4% year-over-year through April, up from 9.7% in March.
While some investors may take a more direct approach by purchasing property to lease out, most stock market investors don't have the time or expertise for that, so we would be looking at investment vehicles such as real estate investment trusts (REITs) or managed funds to take advantage of rising housing prices.
Some might argue that real estate stocks are about to go bust because of an impending recession, but historically, real estate has proven to hold onto its value well in the long-term, even if the economy tanks in the short-term. Thus, these stocks can be good investments regardless of whether the economy is in a boom or a bust part of the cycle.
British Land Co PLC (LSE:BLND, Financial) is one of my favorite stocks in this sector. It is one of the largest REITs in the U.K., with assets diversified across several segments of the industry, including residential and commercial.
The company reported its most recent results last month, which illustrated the strength its portfolio. British Land’s quality properties helped it maintain a positive bottom line despite a relatively lackluster fiscal year. The company has also been diversifying into lower cost housing to target the social housing market and take advantage of rising poverty levels thanks to housing prices rising faster than wages.
The U.K. government regularly provides social housing funds, helping to subsidize the low-cost housing industry. Real estate developers like British Land have been capitalizing on such funding programs to provide affordable housing during market downturns. The company has partnered with county councils to deliver housing solutions that address all tiers of the market. With the U.K. recently raising interest rates despite dire market conditions, subsidized housing is an area to watch.
British Land reported a bottom line of 201 million British pounds ($247 million) for the year ended March 31, which was down 34.3% from a year ago amid an increase in provisions for loan receivables. The U.K. government asked property owners to allow businesses to delay rental payments amid the beginning of the pandemic. Once those payments are no longer able to be delayed, British Land could experience a significant boost to its bottom line, improving the stock valuation if its tenants are able to afford it.
The stock currently trades at a price-earnings ratio of 4.81, which is compelling despite the declining bottom line. Moreover, its dividend yield of 4.43% could be attractive to investors looking for a regular income payments from their investments.
Unlike the U.S. market, U.K. stocks appear to be doing relatively well at the moment. The FTSE 100 Index is down 3.95% this year compared to the S&P 500 Index’s decline of nearly 19%. This suggests that locally, British Land is currently underperforming, which again creates a more positive outlook going into July.
In summary, although the bear trend may still continue after the current rebound, British Land has shown resilience in terms of its ability to retain a positive bottom line and continued dividend payments, which could make it an attractive value opportunity.
