Commercial property I viewed today: good deal or not?

altyfc

I viewed a commercial property today in a town in the north-west of England. Nothing special about the town or the premises, really... but they are centrally positioned close to the town's main crossroads, across from a supermarket [with car park] and within 2 minutes walk of the train station. A pretty good location within the town, I think.

The premises are on the market for £160K and they have a tenant who is halfway through a 10 year lease, currently paying around £11k a year. 5 years remain on the lease, and they have a 'get out' option in 3 years time.

The tenant is a well known High Street name but a business that could have suffered a little with the advent of the internet, ecommerce, etc. From what I gather, though, this particular store is meeting its targets, is doing a bit better than last year, and is "about average" in terms of how it performs relative to other stores in the country. I also understand that this company is closing some stores, but opening others, and maintaining about the same number nationally.

The property is the shop floor only (and the storage space, loo, etc. at the back of the shop, and a cellar which isn't used). There are two floors above the shop which are a flat, and not part of the sale.

I am a Director of a business with circa £150K in a business savings account (earning around 6%). Access to those funds aren't really required in any hurry so could be locked up in a property.

With the commercial property giving a return of nearer 7%, plus whatever increase (or decrease!) in value on the property itself, does this seem like a good deal?

It's hard for me to assess whether £160K is a good price. There seems to be so little that ever comes on the market, but other commercial properties I've seen (whether they're £250K or £4m!) seem to give rise to the same 7% figure.

Does 7% of the building freehold typically equate to annual rent for something like this? Or does it vary enormously from place to place?

I have looked at these two articles and wonder how much I should be concerned by them:
http://www.telegraph.co.uk/money/main.jhtml;jsessionid=VPLXU21LIDUKFQFIQMGSFFWAVCBQWIV0?xml=/money/2007/07/07/cnprop107.xml
http://www.moneyweek.com/file/7966/why-the-outlook-is-bleak-for-commercial-property.html

Thanks for any help or advice.

carolt

This might help a little as it's rather more up-to-date:

http://www.ft.com/cms/s/0/bce7a596-7382-11dc-abf0-0000779fd2ac.html

Doesn't look like the best time to be getting into commercial property, TBH....

FelOn_2

carolt wrote: »

Doesn't look like the best time to be getting into commercial property, TBH....

True, British Land shares got whacked Friday, as they were unable to get an acceptable price for Meadowhall shopping centre in Sheffield :eek:

altyfc

Thanks for that link, carolt.

Understood, FelOn, but this is no Meadowhall.

Given the specifics of this particular property, does it not make sense to put the funds into something like this, rather than have it sitting in an account earning interest at 6%?

The return from renting alone is 7%. I acknowledge that there could be times in the future where the property might be without a tenant, although I think this would be unlikely given its central location (but I suppose it might not be able to command as great a return in the event of a downturn).

Of course, the value of the property can go up or down but this is likely to be a long term investment (10+ years), and property usually goes up in value over long periods of time.

The company already has some investments in shares so is looking to put the money into something else to spread risk.

altyfc

Any other thoughts?

Thanks...

BobProperty

altyfc wrote: »

Any other thoughts?

Thanks...

My only thoughts were that 7% sounds too good to be true especially with a "high street name" as the tenant. Long time since I looked at commercial stuff and I've never owned any, but the returns were in the medium to long term and not much better than bank base rate. Any planning changes being rumoured for the area?

Generali

7% sounds good to me. DYOR of course. Supermarket being built on the edge of town?

benood

Hi - can't really comment on the property investment per se but you should consider tax aspects. If you have a large portfolio of shares in a limited company you are at risk of being defined as an investment company which is not good - CGT taper is poor. Commercial property is a trade and doesn't add to the investment co. calc but I think residential property does.

So before making a decision get some tax advice!

fc123

I am a retailer in a prominent area.there are vacant units cropping up all over town at the mo....also, just because they are a High St name, does not mean that they are a secure long term tenant......a high profile letting in our area has come up to their 3 yr break...basically, they have told the Landlord to reduce the rent by 50% or they are off....from what I've heard..said landlord (a large property company) is agreeing to a deal....................all good evidence for our up and coming rent review.

Upward only rents will soon follow smoking into history over the next decade.

If you don't fully understand the retail business as yet, leave the money on deposit. Retail booms......all over just like BTL.

missk_ensington

The a*se has fallen out of the residential BTL market, because for most new investors the maximum rent threshold wouldn't even cover their loan repayments, given the CGT implications, Buildings insurance, damage and potential stress for barely any profit, many are less forthcoming than in recent years.

However, the rent lon a commercial property is usually much higher than domestic. For example, my Mum bought s Freehold chippy for £100k recently, which is leased, the rent incoming is £950 a month, whereas if she bought a house with her £100k, the maximum rent coming in would be £450-500.

On top of this, there is the chance that your leaseholders will go bust and if they miss a couple of months rent you can evict them and re-sell that lease/create a new lease for X amount, maybe £12,000-15,000 whatever the going rate is. In domestic property if your tenant doesn't pay up, its an absolute nightmare to get them out, costs a fortune and usually takes months on end, often never recouping the lost rent during that time. Commericial is a totally different kettle of fish, if they miss I think its 2 months (although dont quote me on that) you can evict them quickly, easily and without much expense for contravening the terms of their lease.

This is just my personal opinion, but my Mum abandoned the residential BTL market a bit ago, for reasons previosuly expressed, and has turned to commerical instead, making a far greater profit. She recently evicted a tenant of a restaurant she leases, has extended the lease, and is re-selling that lease for £22,000 on top of the rent. Therefore, if you consider it a concern that your potential tenants might go bust, don't, as it would be great for oyu if they did as you could re-claim the lease and make yourself IRO £20,000.

Obviously the downside is that a commericial premises might be harder to lease off than a residential house. I couldn;t possibly comment though without knowing the size, location, usage.... etc

Hope this helps

benood

missk_ensington wrote: »

my Mum bought s Freehold chippy for £100k recently, which is leased, the rent incoming is £950 a month, whereas if she bought a house with her £100k, the maximum rent coming in would be £450-500.

Wow! This equates to about a 12% return (pre costs) - remarkably good in my experience - whereabouts is it?

BTW one other issue to bear in mind is the forthcoming change in rates whereby if a property is vacant for more than a short time rates become payable by the landlord.