Warren Buffett famously told investors to “be fearful when others are greedy and greedy only when others are fearful”. The multibillionaire investor’s advice in his 2004 letter to shareholders was aimed at those who “insist on trying to time their participation in equities”.
But it’s a mantra for some of the most highly experienced private investors in the commercial property market too, Allsop partner George Walker tells a Future of Auctions podcast.
Indeed, one such seasoned investor saw the perfect opportunity to satisfy buyers who were certainly hungry, if not greedy, in the 3 November Allsop commercial auction.
From his home in Florida, the vendor created an online bidding frenzy by placing an office building opposite Windsor Castle into the auction (pictured). The 4,000 sq ft Grade II listed building offered £100,000 of income per annum, a lease expiry in 2023 and clear residential redevelopment potential.
Some 177 bids were placed, driving the price from a guide of £1.5m-£1.6m, a gross initial yield of 6.67%, to £2.6m, a yield of 3.8%. With the base rate stuck at 0.1%, the successful bidder must have been over the moon – and comfortable with the knowledge that there is ample time to draw up plans for a change of use.
So too the savvy vendor, who promptly replaced the Windsor income at a fraction of the price by buying something many would be too fearful to touch: a 10,000 sq ft high street shop let to a multiple in Birkenhead, Merseyside.
He paid just £850,000 for income which is currently bigger than the Windsor office rent by £15,000 per annum – and on a slightly longer lease, expiring in 2025.
“Now clearly that rent will not be sustainable in the Birkenhead market,” says Walker. “But he has researched the town. He knows [his asset] is opposite Primark. He believes the short-term needs of that investment capital have been paid hand over fist.”
Risk and reward
It’s a story which speaks volumes about what has been happening in our towns and on our high streets – and the range of private investor attitudes towards risk.
Indeed, the Birkenhead lot let to Superdrug had gone unsold in Allsops’ September sale (guided at £850,000, a yield of 13.5%). It took a certain type of buyer to seize it as an opportunity against the backdrop of structural change on our high streets and a steady stream of CVAs.
“The frailty of the bricks and mortar retail model has been very, very exposed,” Walker says. “There’s no denying that the town centres with big units have been very challenged.”
And yet Allsop has sold more than £350m of commercial stock so far this year. Retail continues to dominate its auctions, which moved seamlessly from the ballroom to an entirely online offering in March to cope with the Covid-19 restrictions.
“It’s very challenging and largely what we have to do as agents is to work out where the market is for these assets. There is always a market and if you look at the results, we’re not giving everything away. Buyers are selective. They’re still chasing income,” Walker says.
“One of the props of our market is that you’ve got three trillion dollars of money invested at negative interest rates. And if you’re a private investor, you’re going to struggle to get any safe return. So a high yielding sector like ours is going to appeal.”
It’s a situation which Graham Fawcett, co-founder of boutique investment agency Fawcett Mead, is grappling with from a private treaty perspective. He also has a number of joint sales instructions due to go under the hammer in Allsop’s December sale – providing a deadline which he says helps to focus the minds of all parties. Walker and Fawcett expect to work on more of these joint instructions next year.
“Certain towns have been struggling for 10 years or more – probably Woolworths [collapsing] in 2008 was a pivotal point – while some other towns still remain very robust. It is a very popular misconception that all this happened in 2020. It was happening long before this year, but it has very much been fast forwarded during the year,” Fawcett says.
What investors want
Nevertheless, like Allsop, Fawcett Mead has been very active in 2020. It starts every year aiming for 100 sales and has managed to sell 70 buildings – a fine achievement given the impact of the pandemic. “It is having an impact on pricing, but there’s absolutely very much a market,” Fawcett says.
In that re-shaped market, ideas about what constitutes a prime retail investment now look very different. A corner unit in a market town with a national covenant, paying between £100,000 and £250,000 a year used to be a favourite ‘prime’ investment for the private investor.
Convenience stores are what every one of our private investors want to get their hands on
– George Walker, Allsop
Now, says Walker, their idea of prime would be a shop in a suburb, let to a sustainable retailer paying about £35,000 with a flat above. “That’s where we’re getting the 5-6% yields. For the old-fashioned town centre, prime shop values have really changed dramatically,” he says.
Convenience stores, on the other hand, are another highly sought after asset. “Convenience stores are what every one of our private investors want to get their hands on,” says Walker. At auction, a 5% yield on income of £50,000-£150,000 is the benchmark.
Fawcett says he has around 20 supermarkets and convenience stores under offer at the moment. “Co-op stores are always really, really popular,” he says. “The way they’ve rebranded is excellent and investors feel incredibly comfortable with them in their portfolio,” he says. Other big supermarket brands and convenience providers are also highly attractive to investors.
Right product, right town, right tenant
But like Walker, Fawcett has seen significant shifts in investor attitudes towards high street shops in cathedral cities and market towns. In Guildford, long seen as a bellwether for the prime retail market, yields have gone from as low as sub-4% three years ago to 6.25-6.5% today, he says.
“At the private treaty end, there’s been quite a lot of activity in towns and cities like Oxford, Guildford, Chichester and Cambridge. But investors want tenants they can rely on,” Fawcett says.
For private treaty, there’s a lot of activity around the £2m-£5m mark, he adds. “The right product, in the right town, to the right tenant has still got a following and it still has investors keen to invest.”
Pricing is clearly reflecting the realisation that rents are going to come down for many of these town centre assets as they face a decline in retail occupier demand. But how far?
“If you asked 20 retail agents, you’d probably get 20 answers,” laughs Fawcett.
“What is clear is that in time – and it might be some time – rents will settle at a comfortable level for tenants and towns. It’s worth stressing that until a few years ago, they had seen 18 to 25 years or more of growth, probably since the Second World War they’ve seen growth. But clearly that’s changing. Rents obviously will come down and prime probably not as much as secondary and tertiary, but they will come down,” he says.
“It’s all about understanding the town, understanding the tenant and what you think they can afford to pay. And that comes with a good landlord and tenant relationship and speaking to them and understanding the business and what the plans are and how they can work together. I suppose it sounds simple, but there’s a lot to be said for it.”
“Our buyers aren’t really interested in the financial statements businesses produce,” adds Walker. “They want to go and have a look at it and feel it.
“We’re not dealing with people who are just buying for fun, we’re dealing with experienced, informed investors and they understand what’s going on and are happy to take risks, but they are cashed up and ready to go”.
Warren Buffett might just approve.
To send feedback, e-mail julia.cahill@egi.co.uk or tweet @EGJuliaC or @estatesgazette
