Comment: Auction results in the first half of 2018 have proved that mixed-use lots continue to be the most sought after by investment buyers, mainly as a result of tax implications putting downward pressure on the buy-to-let sector. As residential landlords face extra challenges in the months ahead, mixed-use lots are set to continue to perform across the next auction term as purchasers look to spread risk.
Traditional residential buy-to-let investors have recognised the need to diversify their portfolios, and mixed-use properties give them a comfortable halfway house compared with investing in pure commercial units.
Purchasers tend to be private individuals, SIPP investors or smaller property companies that previously may have preferred straight residential options. Accordingly, demand has strengthened. Despite that, the yields have eased to reflect buy-to-let changes and overall market conditions. In East Anglia blended yields of 6-7% are being achieved, while residential yields might be reaching 3% in prime locations only.
At Cheffins’ June property auction a mixed-use investment opportunity in central Cambridge sold for £235,000, 36% over its upper guide price as competing parties pushed up the final bid. Generating an annual income of more than £65,000 from two retail units, a self-contained one bedroom flat and five bedsits, this was the perfect opportunity for a private investor. In the main, demand is for properties that are well located and offer opportunities to grow returns through active asset management, including re-gearing leases or developing unused or underused space, such as outbuildings or upper floors.
Yields are variable and the result of a combination of the property, location and strength of tenant for the retail space, whether these are either an independent or a high street brand. Tenants have to be considered on their individual merits; independents can be as strong or weak as a large multinational. However, the strength of a tenant may be much less important if the property is in a desirable location that could be easily re-let in the event of a default. Similarly, the adaptability of the building can provide an ample ‘insurance’ in the case of a fragile tenant.
We recently sold a couple of properties in Huntingdon that prove this. One, let to a multinational, achieved a gross yield of 8.75%; the second was mixed use with the commercial space let to a prominent local business and achieved a blended yield of 6.6%. Although the latter suggests a favouring of the independent brand, most of this difference can be explained by the potential value in the undeveloped uppers as much as the strength of the tenant. Strip back the uppers and the yield would have been comparable.
Results in Huntingdon prove the success of mixed-use options in up-and-coming regional locations. Although Cambridge city and larger centres are guaranteed healthy yields, the locations that are benefiting from development and inward investment are now proving their worth as lower capital values increase profit margins and yields. This can be seen in places such as Biggleswade, Ely, Peterborough or tertiary areas within main cities.
Mixed-use options in villages can also draw investors with smaller budgets with the added incentive of greater capital growth. It is worth noting that mixed use buildings are often bought by people looking to occupy the buildings themselves – whether they are seeking commercial space and wish to let the uppers, or whether they need the whole building.
Mixed-use buildings expected to draw interest in the next Cheffins sale on 19 September include an investment at Cambourne, nine miles from Cambridge, guided at £660,000. It includes two buildings containing two offices and two flats, with total yearly income of more than £45,000 and a gross blended yield of 6.8% that will increase after an upcoming rent review. For those looking for a smaller investment, there is a restaurant with flat above in Baldock, north Hertfordshire. This is a freehold with a yearly income of £12,000 and a guide of £270,000, providing a current 4.4% yield, which is also set to increase after an imminent rent review.
Top five lot types to look out for in the Eastern Counties over the next auction season
Mixed-use property in up-and-coming locations: There is potential here for capital growth in value as well as larger yields due to lower initial input than in established areas.
Strategic land: The government push on housing delivery shows no signs of abating and this, coupled with the number of land promoters now in the market, can bring opportunities for purchasers.
Mixed-use property in villages: Often overlooked, village-based retail with residential accommodation above can produce strong yields and options for those looking at lower price points. In addition, these can offer potential for conversion into homes.
Well-maintained commercial property: Office or industrial buildings can be low-risk options for funds or individual investors as well as minimal void periods.
Residential renovation: Although the buy-to-let industry is facing its challenges, it does have benefits for investors and lots in need of refurbishment can be picked up cheaply at auction.
