Taking the Long View – Guidance for Resi Investors Moving into Commercial

The below interview with Directors Jesal and Nilesh Patel was published in the latest edition of the Estates Gazette's Property Auction Buyers’ Guide, in October 2017. The focus is on how they are increasingly helping traditional residential investors diversify into commercial property. You can see the article as published here. To get a copy of the magazine, please follow the instructions at the bottom of this article.

From its vantage point as a private investor consultancy with a regular presence in the major commercial auction rooms, Prideview has seen a number of shifts in investor appetite gain momentum in recent months.

Director Jesal Patel says investors are continuing a trend which took off 18 months ago by making the switch from residential to commercial, and many are now adding to their fledgling commercial portfolios – often looking for angles such as management or refurbishment opportunities.

EG - Prideview History“In the sub-£1m bracket, our clients are predominantly locally based investors who went for buy-to-let,” he says. “With the increase in stamp duty and the tax relief changes, some of these people are now looking for a £500,000 shop with uppers. A mixed-use investment means they do not get hit with stamp duty and can offset the interest on loans.”

Yields for this type of stock are in the region of 5-6%, offering an improvement on the 4-4.5% that clients are typically getting on their residential portfolios. For smaller budgets of £250,000-£400,000, ground-floor lock-up shops are popular.

Jesal says one Prideview client recently purchased his third commercial investment after traditionally being a residential buyer. First, he bought his local hairdressing shop in Gerrards Cross, Buckinghamshire, at an Allsop auction. He then ventured further afield with a property occupied by Iceland in Boscombe, Dorset, at an Acuitus sale. The client has since bought a new Tesco store from a developer in Southampton. Jesal says: “He is building a portfolio he can give to his kids, so he is looking for assets without too much risk.”

Looking for a new angle

Fellow director Nilesh Patel says some of Prideview’s clients come to commercial with experience of driving value in their residential portfolios and are now looking for mixed-use properties with an angle.  “They want to learn how to drive value in commercial property,” he says.

Nilesh has also noticed a shift in the age profile of investors who are starting to build a commercial portfolio. Prideview has long acted for investors in their fifties or sixties who have made their money in business and now want to invest it for their families’ futures. However, there is a growing number of younger investors with non-property businesses who want to invest in commercial property at the same time.

Nilesh suggests these investors would previously have gone into buy-to-let investment first. “There is a growing awareness that you need to start small and grow gradually,” he says. “A lot of it is word of mouth.”

Meanwhile, Prideview’s traditional client base of medical investors and other professionals, including hoteliers and retailers, are continuing to target high-quality commercial properties let to blue-chip tenants on long leases. Investments in this category typically start at £750,000, with yields at around 5%.

Shortening lease lengths

However, there is a shift here too because with fewer tenants now signing long leases, there is far less of this type of stock available. As a result, Nilesh says some clients are beginning to adjust their approach and are buying properties let on five-year leases, where yields then move out to 6%-plus.

“We encourage clients not to focus only on length of lease but to look at the property on all its merits,” he explains. That means careful research on how sustainable the rent is and how lettable the property would be. You have to do a lot more due diligence on the property before you buy it,” he says. “Then you can take the view that it is not a problem [when the lease expires]. Another tenant will come in. You have more confidence in your property.”

Typically, clients will have one or two properties on long leases in their portfolio before they will take this next step. “As their portfolio grows, they are open to buying something a bit more risky,” says Nilesh.

Whether clients are seeking a £500,000 shop with uppers or a £1m store let to a blue-chip retailer or restaurant, the challenge in the current market is competition for the best stock. “In the short term there is a lot of demand and that is pushing prices up,” says Jesal. “The changes made by the government to slow down the residential market and help people get on to the property ladder have worked, and this will probably drive what happens in the future.”

To get your FREE copy of the Estates Gazette Property Auction Buyers' Guide, worth £5.99, please contact us for an online download or come into our office to pick up a hard copy. The 80 page Autumn '17 issue is aimed at Private Investors aiming to grow their wealth through auctions and is full of expert views, tips and analysis.

EG Profile Taking the London View Oct 17

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