COMMENT: At a time when commercial property values are hard to precisely determine and the economic outlook remains uncertain, investors are focusing on asset income streams and how to secure them – to the exclusion of almost all other normal investment metrics.
Of course, while simply collecting rent – any rent – has been the priority during the past year, it does seem that ‘income, income, income’ is now the new mantra for the traditionally location-fixated property sector.
Robustness of income
One of the effects of this has been that income which would, until relatively recently, have been considered short-term is now more than acceptable to investors. It is the covenant strength of the name on the lease which has become the principal focus. Accordingly, an understanding of the robustness of income and the ability of an occupier to pay rent will play an increasingly important part of successful investment strategy for private investors.
Nowhere is this trend more vivid than in the auction room. At our last auction we offered for sale four Santander high street branches, let on new five-year leases with no break options. In locations as diverse as Solihull, Leigh-on-Sea and New Milton in Hampshire, each found buyers at yields of 4.8%-5.5%.
This type of asset with a good covenant and a new lease at today’s rents is hugely popular with private investors. They demonstrate that there is still appetite for high street investments. In this instance, the kicker was some potential scope for residential alternative use on the upper floors, but the buyers would be mostly drawn by the income secured on a sound covenant.
I was recently part of a panel which discussed these themes at a webinar that also featured speakers from IPSX – the nascent ‘property stock exchange’ – and the property income analysis specialist, Income Analytics. Both of those platforms in their own way have found a timely relevance in the context of today’s market.
IPSX will enable private investors to make relatively small investments into prime large-scale assets and enjoy a coupon-style income return without the process of having to buy an asset outright and managing it. Income Analytics is a new tech-based solution which analyses the quality of income secured on a property and gives it a bond-style rating. As such, an investor – from the comfort of their armchair – would be able to select a property in which they want to buy a share and, if required, check the grade of its income quality.
Widening of choice
Of course, in the past year we have also seen commercial property auctions become ‘plug-and-play’ as sales have gone fully online, and have put direct investment in reach of anyone with a device and a broadband connection. So whatever route you want to take, the means of commercial property investing by remote control are now almost fully in place with access, transparency and the checks on income quality available via the click of a mouse.
So what does this mean for auctions? Will it seem to be a more involved route to market in comparison with a commoditised approach to commercial property investment? I think not – and not just because of the nature of my business!
Property investment is often about looking for an ‘edge’, and the ability to generate more income than what is entailed at the time of purchase. In the case of those Santander branches, they were purchased 11 days ahead of the prime minister announcing that in-person retailing would recommence in April, and three weeks before the chancellor launched a new £5bn package of support for UK high streets. As a consequence of that positivity, the yields achieved by those banks on the day of auction have no doubt sharpened ever so slightly since. As such, the income on the assets is as secure as it was when the hammer came down, but the capital value has now been made a touch more progressive than it was.
And while investors may anticipate, but can’t influence, macro factors such as these, the ability to read the property cycle and what is happening in the economy can enhance both the income from a property – and its capital value.
Ultimately, whether it is buying via IPSX or through our auctions – or more likely a mixture of both – the good news for private investors is a widening of choice and the ability to access different types of commercial property asset.
Depending on where investors want to sit on the risk-and-return curve, some will be drawn to the prospect of steady income generated from prime assets, whereas others will undoubtedly prefer having complete control of an asset and the prospect of squeezing more income from it.
Richard Auterac is chairman of Acuitus
