Investing Small – Thinking Big
18th March 2013
That the recession hit the commercial property sector has been well-documented, but there are now clear signs that the industry has awoken from its slumber.
A decade ago, commercial property made up a sizeable portion of an investor’s portfolio, but when the recession came along, some commercial property funds fell by as much as half as fears grew, both about the UK’s economic prospects and the levels of debt attached to the properties.
However, those with cash in the bank soon realised that they weren’t going to make any serious money by letting it sit there, as interest rates and bonds dipped to historic lows.
As the economy gathers pace, many are turning back to property. Returns on commercial property include both income, in the form of rent, and potential gains in the properties’ value. The latest data from the IPD UK Commercial Property Index shows commercial property has generated an 8.9pc total return over the past year. To augment this, there is now a pent up demand for office, retail and warehouse space as the recovery gains strength.
At NG Chartered Surveyors we’ve noticed a definite investor trend at the smaller end of the market. We are now being retained by clients to acquire commercial property for investment purposes, often to be held in a self Invested Pension (SIPP), to provide them with both an income and capital growth.
A perfect example of this was an adventurous client looking for a double digit return on their investments. NG has acquired a 4,500 sq ft warehouse unit in Sandiacre with a short term lease back to the vendor whilst a new tenant is sought. The same client is looking to sell their existing student residential portfolio to replace it with more commercial property investments as they are no longer willing to invest the considerable amount of time to manage an “ebullient” group of students.
For a cautious investor more interested in long term secure income, NG has also recently completed the purchase of a shop in Scotland let to McColls for an unbroken term of 20 years. The property is let on a lease with predetermined rental growth already factored into the terms, to a company affording the highest credit rating (outside of Government’s) so the income and future capital value is assured for many years to come.
Closer to home, we bought the new Costa Coffee which recently opened in West Bridgford for a private client. The property benefits from a 10 year lease to a solid covenant and excellent prospects for rental growth given the continued and sustained interest in the location.
Clearly, there is a good return to be made out of investing in the smaller end of the commercial property market. So, what should an investor look out for when s/he is thinking of taking the leap. Here’s a checklist of what Henry Henson of NG thinks will get you the biggest bang for your buck.
- Only consider stock which will be easy to re-let.
- Location is paramount.
- Ensure that there are long term secure tenancies.
- Buildings with financially strong tenants are deemed more secure, so sell at a premium. Conversely, a property with a weaker tenant, may present a bargain. Do your homework.
- Industrial/Warehouse use will benefit the landlord from 6 months empty rates relief should the property fall vacant. For offices and shops, this is only three months.
- New build properties typically will incur lower lifetime running costs, an ever increasing concern for occupiers as energy prices continue to escalate.
- For SIPP investments, the building cannot include a residential element.
- Rental growth is key. Often leases now incorporate either fixed increases or have a “cap and collar”, whereby the rental will increase within a predetermined range.
Using a specialist commercial property agent is also important. Often we are able to acquire properties off-market, thereby negating the risk of competition pushing prices higher. We also listen to the needs of the client and determine our advice accordingly; what is right for one person won’t necessarily be right for the next. And perhaps most important of all: we simplify and streamline the whole process, making your money work harder and smarter for you.