We have all read the headlines: uncertain future for high-street shops, more red tape for buy-to-let landlords, economic worries over Brexit.
Yet despite the alarm warnings, the reality is that there has rarely been a better time to buy a commercial or residential property at auction.
The reasons are positive enough, but let’s start with a negative: where else would you put a modest investment today? Analysis by investment company Property Partner shows that a £100 investment in 1996 would have returned, by spring 2016, £224 in cash savings, £299 in gold, £473 based on the average FTSE All-Share Index, or £608 in residential property across England and Wales – or a remarkable £1,195 on a London property.
However, strong returns on commercial or residential property are never guaranteed. Research and expertise are required if property investment over the next period – with Brexit looming, and an uncertain economic and political future – is to be as good as in the recent past.
The starting point is to decide a strategy based on your objectives.
A key early decision is whether you most want a strong regular income from property, or have more emphasis on capital appreciation when you eventually sell your investment. Likewise, do you want to improve the property now, and so immediately to add value before letting it out, or do you want a ready-to-use flat or a shop with an existing tenant in place?
Finally, do you want the investment property to be near where you live? That may be necessary if you plan to manage it yourself, but by using a managing agent you can buy anywhere in the country, seeking the perfect property to achieve your goals – even if it’s not nearby.
“The excellent thing for an investor is that properties meeting all or any combination of these goals can be found at auction,” says Roger Lake, founder of Auction House, a firm operating more than 40 auctions rooms across the UK and selling more than 3,000 residential and commercial properties annually.
Lake says most small-scale property investors head for buy to let because it has a proven track record of providing good rental income and appreciation. It also has very strong long-term prospects because of historical levels of under-supply.
“Irrespective of Brexit, the trends are that the population is increasing and housebuilders are not meeting demand.”
“Irrespective of Brexit, the trends are that the population is increasing and housebuilders are not meeting demand – with the result that demand for rental stock is increasing very significantly,” he says.
Lake’s advice to first-time bidders is not to be misled into thinking they should buy a flat close to their principal home. “The best returns are often elsewhere, and if it is being managed by a professional agent, distance is no obstacle,” he says. The returns he refers to are yields – they provide a key performance indicator, measuring the proportion of the purchase price recovered in rent over one year.
Investment firm LendInvest monitors buy-to-let rental yields and says between 2010 and 2016 Manchester was top, with an average 6.8% yield – purchase prices are relatively low there, so rents cover a higher proportion of the purchase price. In Greater London, however, where purchase prices are high, the yield was just 4.0%.
However, buy to let in general has been the subject of a string of new fiscal and regulatory measures: the former to claw back more money for the government; the latter to improve the quality of the properties that are the backbone of the UK’s growing private rental sector.
New fiscal measures include a recently introduced 3% stamp duty surcharge on the purchase price of buy-to-let property, and the phased reduction of mortgage interest tax relief for landlords, reducing annually from April 2017 to April 2020.
Regulatory changes include five-yearly licensing of some private rental properties by some local councils, stricter controls over quality and size of Houses in Multiple Occupation, and mandatory smoke and carbon monoxide alarms in many flats and houses that are let.
“These changes haven’t dampened the enthusiasm of bidders at auctions, because many renovate a property they have bought before letting it out, so add value that easily covers extra costs anyway,” explains Chris Coleman Smith, director of auctions at estate agency Savills.
He believes the Brexit vote may have surprised many, but says auctions “were back to normal without skipping a beat”. He also believes the government’s recent increases in taxation on property – especially buy to let – will be factored into budgets rapidly.
“Most people are in property investment for 10 years, or often much more, so additional costs are effectively spread over the long term,” insists Coleman Smith.
Yet residential is not the only option. Commercial property is usually cheaper, although it requires different investment expectations and strategies.
Diversifying a property portfolio, even a small one with just two or three units, is a good way to spread risks, especially in a period of possible economic uncertainty.
Whereas residential tenancies last an average of three years – and require a landlord to address wear and tear issues – commercial tenancies can be much longer, with guaranteed rent rises after, say, five years, and they need less day-to-day management. Yields can be strong on shops in particular – an average of 6.25% per year – but there is typically far less capital appreciation on a commercial property than on a house or flat.
“The economy is still very strong, employment and retail are good, yet there is a long-term housing shortage. Whether we like it or not, this represents a perfect situation for investors to come to an auction and seize the moment.”
Stamp duty for commercial property has recently been reformed, but in a way considered more attractive than that on residential property. Buyers are now charged a different rate for each band of the commercial unit’s value, instead of paying a flat rate. According to the Treasury, this will lower stamp duty bills for 90% of buyers.
However, unlike residential property, which typically appreciates even when empty, commercial units often remain static in value if they are vacant and can prove harder to let.
“Many first-time investors buy shops, and the key is research,” advises George Walker, commercial property auctioneer at Allsop. “If every third unit in a local centre is a charity shop, look elsewhere. If the shop you like is busy, stand outside it for two hours and compare it with others nearby: that will give you an idea if it is going to survive.”
The demographics of an area are also a clue to long-term success, especially in an era of increased online shopping: affluent areas often actively support local shops and generate more self-employed businesses that use small offices, producing low vacancy rates.
In exceptional circumstances – and a local council planning department will advise on the feasibility – it might even be possible for a commercial property to be converted to residential in the long term, producing significantly bigger gains in return for the costs of securing planning consent and undertaking conversion work.
“At first, the Brexit decision and the political turmoil of the summer seemed to be really bad for property investment but actually it’s turning out to be the reverse,” explains Gary Murphy, who runs the residential auction division of Allsop.
He adds: “The economy is still very strong, employment and retail are good, yet there is a long-term housing shortage. Whether we like it or not, this represents a perfect situation for investors to come to an auction and seize the moment.”
The long-term lure of buy to let
Despite an estimated 29 changes to buy-to-let taxes and regulations since 2014, the sector remains overwhelmingly attractive, thanks to strong yields and appreciation.
The House of Lords all-party Economic Affairs Committee says 300,000 homes should be built annually in England alone to meet the growth in households caused by people living longer and in more single-person households – and if overcrowding is to be cut. The National House Building Council says some 41,222 new homes were registered across the whole of the UK in the second quarter of 2016 – only around half the supply recommended by the Lords.
The excess of demand over supply means the long-term trend is for house prices to rise – providing buy-to-let investors, among others, with long-term capital appreciation.
Meanwhile the English Housing Survey says private renting grew by 17,500 households per month on average in the 10 years to 2014. Savills predicts that by 2020 around 24% of households in England and Wales will privately rent; and as demand exceeds supply, so rents will increase across different regions from 10% to 20%.
This will provide rental income for investors, to complement the likely capital appreciation.
Online auctions
The vast majority of sales still occur at auctioneers’ rooms or hotels, but increasing numbers are handled online, with variations on the rules that apply to physical auctions.
Some sales are through online-only sites such as www.lot11.co.uk. Others are through online divisions of established “physical” auctioneers such as Auction House or Allsop.
When Allsop sold a phase of a new-build scheme by Clearview Homes at West Drayton, more than 28,000 people visited the website – 15% from outside the UK. Some 40% of lots sold within a few hours and, as is common with some online sales, all had their contracts fully exchanged rather than merely having reservations made.
“We are providing both buyers and sellers with a convenient and transparent new method. For the developer, binding contracts are achieved on the fall of the virtual hammer. For the buyer, there is no risk of gazumping and an assurance that a fair price has been agreed,” says Allsop’s head of residential auctions, Gary Murphy.
Online auctions case study
Toby Limbrick, director, Network Auctions
Regional auctioneer Network Auctions conducts online auctions under the Network E brand, using the online auction platform supplied by Essential Information Group.
Director Toby Limbrick says this new method of sale is a hybrid combining the best elements of private treaty and traditional auction.
Properties are listed for three weeks, culminating in a three-day bidding window. This gives potential buyers time to view the property and undertake due diligence prior to bidding. A legal pack is available at least seven days prior to the auction closing. Bidders must register to bid by accepting the online auction terms of business, providing ID and pre-authorising a payment card. At the close of the auction, the winning bidder secures an Exclusivity Agreement, granting them a fixed period (in this case four weeks) in which to exchange contracts. They pay a non-returnable Reservation Deposit of 1% of the purchase price, in part payment for the property plus the auctioneer’s Exclusivity Arrangement Fee, which is fixed at £800 plus VAT.
If the buyer defaults, they lose their deposit, which is shared between seller and auctioneer. “This is in stark contrast to private treaty transactions, which can take months to exchange and buyers can withdraw without penalty at any time,” says Limbrick. From exchange, they have a further four weeks in which to complete.
In August, Network E had a strong response to the online auction of a three-bedroom house in Redhill, Surrey. The property has planning granted for a two-storey extension to create two more bedrooms and two more reception rooms. Power Bespoke Network Auctions, a local estate agent and licensed Network Auctions partner, listed the property and conducted multiple viewings, culminating in 22 parties signing up to the website to “watch”. Nine of those registered to bid, of which eight individuals made bids. In total there were 88 bids, driving the price from a guide of £350,000-plus to a sale price of £465,000.
Limbrick says: “Network E is an auction that all buyers can participate in, including those with related sales and mortgage finance. People in this demographic are often deterred from buying at traditional auctions, where exchange of contracts is formed on the fall of the gavel.”
