Like many investors, I’m constantly on the hunt for the best stocks to buy. And right now, there are quite a few UK shares on that list, including LondonMetric Property (LSE:LMP).
This FTSE 100 commercial landlord has quite an expansive real estate portfolio, with the bulk of it made up of logistics centres and warehouses that the e-commerce industry heavily depends on.
Considering the government has explicitly targeted these types of properties in its latest Autumn Budget with higher business rates, investing in LondonMetric may sound like a crazy idea. However, when digging deeper into the details, it turns out this tax hike may not be a problem after all.
Here’s why.
A lucrative landlord
The incoming increase in business rates is a tax hike that LondonMetric doesn’t have to pay. Why? Because business rates are ultimately the responsibility of a property’s occupants, not the owner.
LondonMetric will, of course, still be on the hook for any of its properties that remain empty. However, with its occupancy level at 98.1%, that tax bill isn’t likely to make much of a difference to earnings.
What about other types of property taxes that could get hiked in the future? Well, LondonMetric isn’t on the hook for that either. It’s a real estate investment trust (REIT), whose status protects its rental income from corporation tax. And its specialisation in triple net lease (NNN) agreements means that tenants are ultimately responsible for all property maintenance, insurance and, of course, taxes.
This exceptional resilience and capital-light operating model is how the company has managed to deliver consistent dividend hikes every year for over a decade. And even with a yield of 6.6%, the group’s underlying earnings are still more than sufficient to cover its dividend obligations.
In other words, the stock’s dividend could climb even higher moving forward. But like all investments, there are always risks. So what’s the catch?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Risk versus reward
While LondonMetric’s not directly on the hook for higher business rates, the increased financial pressure on some of its tenants may ultimately translate into lease cancellations or non-renewals. This risk’s only further compounded by persistent weakness in the UK economy.
A lot of LondonMetric’s tenants operate within the brick-and-mortar and online retail space. This includes industry titans like Amazon and Tesco. But if persistently weak economic conditions drag down consumer spending activity, demand for new warehouses, or even retaining existing ones, could suffer, potentially putting LondonMetric’s currently impressive occupancy level at risk.
The bottom line
The lack of faith in the UK economy, paired with elevated interest rates, has made the real estate sector rather unpopular among British investors, at least by historical standards.
However, while there are undoubtedly risks to consider, I think the market has overlooked LondonMetric’s competitive position as well as its robust financials.
At a price-to-earnings ratio of just 12.6, paired with a dividend yield more than double that of the FTSE 100, I think this REIT could be among the best stocks to consider buying now. And it’s not the only investment opportunity that I’ve spotted this week.
