Lloyds Bank (LSE: LLOY) has been a lender for a very long time. But times are changing. Operating in a still weak economy and a low interest rate environment, it is now diversifying. To this end, it just became a landlord.
A…what? Yes, you read it right. News of its plans to become a property owner were released a few months ago. But it is now ready to buy its first set of properties in Peterborough according to the latest report by This is Money. These will then be rented out.
Good move or not?
This may be a clever move in the current environment. The UK’s housing market is on fire. House prices have been rising every single month in 2021 so far. The average house price rose to a record high of £336,073 in June, according to the digital property marketplace Rightmove. Rentals are on the rise too.
But I doubt that Lloyds Bank has just the short term on its mind. This is clearly a considered decision. The bank is the largest mortgage lender in the UK, which indicates existing knowledge of the sector. Also, the prospects for the housing market look strong. According to real estate agents Savills, rents are expected to rise by 17% by the end of 2025.
Real estate stocks vs Lloyds share price
It remains to be seen whether or not this move works. But as a potential investor in the stock, right now I find it more encouraging than not. I mean, just look at the bounce back in FTSE 100 real estate stocks.
Take the example of Persimmon, whose share price is almost back to its pre-crash highs. It also has a huge dividend yield of almost 8% right now. The Lloyds share price has also risen considerably, to be sure. It is up over 50% from last year. But it is still below its pre-crash highs. And its dividend yield is at a muted 1.2%.
To be fair, there are some inherent biases in this performance. The housing market has been pushed up quite a bit because of policy support. On the other hand, banks’ dividends are held back by policies to lower potential systemic risk. Still, it does indicate that if Lloyds Bank was already a diversified entity last year, it may have suffered far less in the pandemic.
What can come next
I think that could have translated into a sharper share price rise sooner as well. Even now, there is no way of knowing if the Lloyds share price will indeed continue rising. It was pretty flat for years before the stock market crash of last year, and things became even worse after that.
But if over time the bank were to build up a strong real estate portfolio, the share may finally break out of its funk and have the breakthrough it so needs. But it is all conjecture at this stage. The move may not turn out well at all. Only time will tell. Until then, my decision to buy the share or not will depend on other developments.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.
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