I would much rather buy property shares rather than buying an investment property right now.
There are several negatives to looking at residential properties in my opinion. There is a fairly limited supply of properties to buy – so the price isn’t likely to be that good (yet). Rental income is uncertain due to COVID-19 impacts and rental yields are low. Property prices may fall over the short-to-medium-term.
I think property shares have the potential to offer better growth and income potential:
Rural Funds Group (ASX: RFF)
Many different types of properties are struggling at the moment. Office buildings and shopping centres have taken a valuation hit this year. But farmland is one area that may see continued strength over the shorter-term and the longer-term.
Rural Funds owns a variety of different types of farms including vineyards, cattle, cotton, almonds and macadamias. This offers good diversification, much better than owning a single property in one location.
The property share leases its farms to a number of high-quality tenants like Treasury Wine Estates Ltd (ASX: TWE), Select Harvests Limited (ASX: SHV), Olam and JBS. Strong tenants are more likely to be able to keep paying the rent as well as generating long-term earnings growth (and afford higher rental payments). Rural Funds also owns significant water entitlements which are leased to its tenants.
The real estate investment trust (REIT) aims to increase its distribution each year by 4%. At the current Rural Funds share price it offers a FY21 distribution yield of 5.4%.
Centuria Industrial Reit (ASX: CIP)
This is another REIT. I think it’s better to own a portfolio of quality properties spread across the nation rather than a single building like an investment property.
Centuria Industrial owns various industrial properties, indeed it’s the largest domestic pure-play industrial REIT on the ASX. Some of its largest tenants include Arnott’s, Woolworths Group Ltd (ASX: WOW) and Visy.
Today the property share announced that it’s going to acquire a Telstra Corporation Ltd (ASX: TLS) data centre for $416.7 million with a 30-year weighted average lease expiry (WALE), as well as two other smaller acquisitions.
After that acquisition its portfolio will have 53 properties with a WALE of 10.2 years and occupancy of 98.2%.
Centuria noted that there is a rising trend of ecommerce, particularly for non-discretionary items, like groceries and pharmaceuticals, which is driving lease demand along with manufacturing and packaging. Warehouses are becoming even more important.
At the current Centuria Industrial reit share price it offers a FY21 distribution yield of 5.1%.
Brickworks Limited (ASX: BKW)
Brickworks is one of my favourite property businesses – it operates a variety of divisions.
Its building product divisions are facing difficulties due to COVID-19, but over the long-term I think construction will return to normal. In Australia it produces and sells bricks, roofing, precast, paving, masonry and so on. I like the idea of profiting from the construction of properties without taking on the risks of ownership (and the associated debt).
The property share also has a US building products division which is largely just focused on bricks at the moment. After a few recent acquisitions Brickworks is now the market leader in the north east of the US.
I think it’s a good buy at the moment because of its other assets, which are defensive. It owns a 50% stake of an industrial property trust along with Goodman Group (ASX: GMG). The trust is planning to build two huge warehouses for Amazon and Coles Group Limited (ASX: COL), which will increase the value and rental income.
It also owns a large amount of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares, which provides defensive earnings and growing dividends to Brickworks (and all other shareholders).
I think the best time to buy cyclical shares, like a construction business, is during the difficult times – such as right now.
At the current Brickworks share price it offers a grossed-up dividend yield of 5.2%.
Each of these property shares are defensive, have long-term growth prospects and offers much more diversification than a single investment property. At the current prices I think Brickworks is the best value option.
Where to invest $1,000 right now
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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks, RURALFUNDS STAPLED, Telstra Limited, Treasury Wine Estates Limited, and Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.