5 Top Tips To Assess Covenant Strength

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Nilesh Patel, Director of The Prideview Group, gives an insight into how an investor should go about assessing the strength of a tenant, in the context of an uncertain retail market outlook. This short piece was published in the latest edition of the Property Auction Buyers’ Guide, published by the Estates Gazette in June 2018. You can see the article as published here alongside another piece about what and where we have advised our clients to invest in at varying budgets. 

The main difference between investing in commercial property compared to residential property is that the value of your property can be substantially influenced by who the tenant in occupation is.

So if it’s not a AAA covenant on the hook, follow the below steps to give yourself the best chance of success:

  1. What is the tenant’s track record? Look at their history in that site but also more widely if they are a multiple.
  2. Go deeper into their finances. If accounts are available, for a smaller independents profitability is key, for a multiple or Blue-Chip tenant it’s their net asset position that is your security.
  3. Visit the property during their busier period and make your own judgement as to their trade. Check out the competition too.
  4. Talk to an expert. Whilst we avoid some tenants like the plague, there are others we invest in over and over again. Such information can be very valuable.
  5. Look beyond the tenant – have a plan B for your property should they vacate. Does the unit have goodwill for a similar business to inherit, would it suit alternative commercial uses or even residential conversion?

If you would like to discuss this or any other property matter please contact Nilesh here. You can read the Estates Gazette Property Auction Buyers’ Guide online now by registering on their website here.

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