The market may have softened but there are still sound investments to be made, say George Walker, partner in the Allsop commercial auction team, and Gary Murphy, partner in the Allsop residential auction team.
In line with the capital markets across the UK, the political uncertainty – a direct result of the country’s vote to leave the European Union – combined with economic challenges and changes in policy have undoubtedly led to a softening of the auction market. Both residential and commercial revenues have been hit, whether it be the ailing high street or the tapering of tax relief on buy-to-let mortgages.
However, combined commercial and residential auction sales in the past 12 months amount to £4.1bn (EiG). This depth and, of course, breadth of spend shows that buyers are still very active and chasing opportunities that suit them. But where should they look?
High street shops – up to £500,000
Changes in shopping habits, poor management and business rates have all combined to either contribute to the collapse of some of the country’s biggest retailers or forced others to review their retail portfolio.
Despite this, there is still appetite for well-let retail investments in good locations. And for investors who are new to the commercial property market, retail assets with or without upper parts are often much easier to grasp than industrial or alternative investments.
Investors looking to purchase an asset on the high street will be buoyed by the chancellor’s Budget changes to business rates. He has given 30% rates relief to thousands of small shops with a rateable value of £51,000pa or less for two years from next April. This should give a much-needed boost to the market.
Lot 31, a high street shop let to Vision Express (main image) for 10 years in Warminster, Wiltshire, was highly sought-after at our October commercial auction and presented a popular investment opportunity.
As well as being situated in a prominent location in a thriving town centre, its long lease ensures an income of more than £17,000 pa for the next decade. Long enough to see through the existing political uncertainty.
Let to the optician and eyewear retailer, it is less exposed to shopping trends and online purchasing than your typical retailer. It sold for £335,000 after very competitive bidding, giving the buyer a solid return of 4.9% net.
Shops and upper parts – £1m+
For investors with a bigger budget, shops with a residential component often provide the best of both worlds. Residential above shops can offer the opportunity to add value while benefiting from lower stamp duty thresholds.
Lot 144, sold at our October commercial auction, is an ideal example. Located in a busy high street location in Tooting, south London, it comprised of a vacant shop with six flats above.
Currently generating £42,000 pa, it had the potential to generate more than £90,000 pa from the lease of the vacant shop and one of the studios, taking the yield to around 8.5%.
Investments with permitted development
Demand for assets that are ripe for redevelopment have consistently performed well at auction, with investors and developers utilising permitted development rights to transform neglected office blocks into new homes.
Smaller investors looking for a bold project have the opportunity to co-invest with like-minded partners and exploit the potential to make significant gains together.
The benefits of converting commercial buildings into residential use are numerous. Sites with office blocks are often well-suited for residential development. The buildings tend to be close to major roads, train and Underground stations.
For investors, PDR also provides the opportunity to largely bypass the traditional planning process to secure consent and build quickly.
As affordability grips the owner-occupier market, these buildings can be flexible to best suit residential demand in the area, whether it be transforming sites into student accommodation, co-living schemes or a build-to-rent development that will cater for the growing generational shift towards renting.
Lot 45A, sold in our October residential auction, attracted significant market interest. Sold prior to auction to a residential developer, this vacant four-storey office building in Chelmsford, Essex, extends to 15,360 sq ft and lends itself to redevelopment. It had prior approval for conversion into 27 apartments with parking for 27 cars. Although the final sale price was not disclosed, it was sold in excess of its £3.1m guide.
Those investors looking for immediate income can still find double-digit returns, if they are prepared to look further afield. Lot 202 in our October sale was a parcel of 20 leasehold apartments in Plymouth, Devon. Each unit was let with a collective income of £83,600 pa. It sold for £650,000 and will show a gross return of nearly 13% to the buyer.
The auction market remains a very liquid and cash-rich aspect of UK real estate. We should be proud of the impact and value that it delivers to the economy. Our buyers will continue to seek out the right opportunities. Auctioneers often talk about getting pricing right, and this is more important than ever as these shadows of uncertainty continue.
