Alex Butler, head of private client team, Allsop
£500,000
At this entry level for a private investor, consider a retail unit in a prime position in a strong town. It may be sensible to buy in a town or city well-known to the investor so that its trading performance is understood and has been monitored over a number of years.
The key is to ensure the passing rent is sensible and sustainable for the tenant. The investment should be let to a recognisable business and ideally include the upper parts, which may lend themselves to residential use in the future. Depending on the location and quality of tenant, a yield of 5%-6.5% should be realistic.
£1m
This lot size will enable the investor to have more options to choose from in the auction brochure. A very popular investment over the past few years has been supermarkets with unexpired terms of 10 years-plus. We have sold numerous “Metro” units let to Co-op, Tesco and Sainsbury at yields of 5%-plus.
Again, the key is to ensure the rent passing is at the right level and also that the lease includes fixed rental uplifts linked to RPI. This would make a sound investment with the guarantee of rental growth.
Alternatively, I might be tempted to seek a little more risk by compromising on lease length to achieve a higher yield but the quality of the location should limit this risk. We sold a shop and flat in The Lanes in Brighton in July for £1.08m (6%) with four years remaining on the lease. This provided a mix of commercial and residential at a generous yield in a very popular location.
£2m
Opportunities in the auction room reduce at this level and the private treaty market comes more into play.
A sum of £2m allows a private investor to consider a spread of risk by owing a multi-let investment rather than relying on one particular tenant. For the risk-adverse investor, I would be tempted by the unbroken retail parade I sold recently in New Cross, London, SE14 – 10 shops let off low rents in a densely populated London suburb. The price of £2.2m yielded 6.5% and has potential for future rental growth. The downside is limited because, if a unit becomes vacant, the yield is only marginally affected.
£4m
At this level, the permitted development rights sector should be seriously considered. The advantage of buying an asset where PDR could be applied is that the future value of a residential conversion can underpin the current value of an office building – that is, if the office tenant decides to vacate at the end of their lease then the property is worth the same or more if PDR can be obtained and the property can convert to residential use.
A good example was an attractive office investment I sold recently in Tunbridge Wells, let to a firm of lawyers with three years unexpired on their lease. The property is in a residential area in the heart of the town. We sold it for £3.5m to a local investor/developer. This reflected a capital value of £275 per sq ft compared with “in-town” residential values of £500 per sq ft-plus. So whether the tenant decides to extend their lease or vacate, the investor is in a positive position.
The downside of PDR investments is that owing to the number of players in this market, often the eventual price gets inflated. It is important to stick to a figure that works rather than get carried away with competitive bidding.
£8m
A private investor runs the risk of competing with the UK institutions at this kind of level. To avoid this, I would invest in a mixed portfolio, spreading risk across different sectors and lease lengths.
Three types of opportunities which I would focus on would be, firstly, care homes let on long leases, because they are underpinned by the ageing population profile. Secondly, there are mall multi-let South East industrial/warehouse estates – rents in this sector are rising year on year. Thirdly, investors should look at secondary office investments located in a growing “good story” city such as Bristol or Bath, which offer asset management opportunities including refurbishment or change of use.
Philip Waterfield, director, auctions, Strettons
£250,000
A quarter of a million will buy you a one- or two-bed flat on the outskirts of London, or you could instead think about a local lock-up shop, let to, say, a newsagent, betting shop or other local trader. For this budget it would be likely that the upper parts would have already been sold off and I would expect a return of at least 6%-7%, which on a budget of £250,000 means a rental income of about £15,000 a year (or £300 a week) or more. In October last year we sold a small two-storey commercial property in Waltham Cross let to Anglian Windows for £300,000, which at a rent of £20,000 pa shows a 6.6% initial return.
£500,000
With £500,000 to play with there are certainly more options and you could, say, buy a double shop or a single unit in a London suburb or a small market town, maybe with a higher profile covenant.
However, a big name isn’t always a guarantee – remember Woolworths, MFI etc, which fell by the wayside? You would expect to see more rental income than for a local shop but it’s the covenant that will fine-tune the yield. I’d be looking for circa 5% but might accept a bit less for a blue-chip tenant. This property might include upper parts, which may have potential for you take back for residential conversion in the future.
In February this year we sold an A3 commercial unit in Camden Town let at £15,000 pa for £491,000 showing a 3.1% return, so perhaps not the best investment rate but demonstrating the popularity of the area with strong bidding above the £315,000 to £325,000 (or 4.8% to 4.9%) guide.
£750,000-£1m
Above half a million we are not necessarily looking for bigger, but better. With a budget of £750,000-£1m we are now looking at a better investment in terms of improved location, tenant and perhaps higher rent.
However, in these circumstances it is more likely that we will see a lower rate of return at say the 4.5%-5.5% level but achieve a greater security of income and hopefully improved growth prospects. For this budget you could buy a well-let high street convenience store, fashion outlet or coffee shop within in Zone 2 or 3 in London or in a prominent position on a high street in a regional market town.
In October 2016 we sold a 5,000 sq ft store in Luton let to a subsidiary of major retailer for £748,000, showing a 5.6% return.
£1m-£2m.
At £1m-£2m we can consider purchasing property on major high streets with major tenants where you might expect a greater security of income but a sub-4.5% return.
For my money, at this level I’d look at a well-let industrial unit which, given the fickle nature of the UK high street, might prove to be a safer investment. Depending where it is there may be potential for alternative uses, not least residential, if the building becomes vacant at a later date.
Unless you are experienced I would steer away from the more unusual properties such as pubs, clubs, nurseries to name but a few. The main thing is to manage risk and ensure you have done your research into the location, the tenant, the business and a potential exit route if it all goes wrong. Can you re-let it, convert to alternative use or sell it on?
John Townsend, head of the auction advisory service, Harold Benjamin
Below £100,000
There are still quite a number of smaller lot sizes to be found in all the main commercial auction house catalogues. In the Allsop July catalogue, two lots caught my eye in this price bracket.
Lot 159 was a freehold convenience store and residential investment on the outskirts of Marlborough. Let to a Mace franchisee until 2026 at a rent of £7,963 pa, it sold prior but had been guided at £85,000, which at that level would have shown a gross return of 9.36%.
And the following lot in New Park Street, Devizes, was a leasehold retail investment, let on a new 150-year lease from completion. The property was sublet to a local hair dresser and included a ground-floor hair salon and a two-room flat above. It was let at £6,000 pa but sold for £70,000 which would have shown a gross yield of 8.57%.
At the Acuitus sale, a retail investment in High Street, Sandown in the Isle of Wight let to the RSPCA until 2021, but with a break in 2019, at a rent of £7,225 pa, sold for £68,000, showing a gross return of 10.62%.
At Lambert Smith Hampton, a modern freehold ground rent investment in St Albans Road, Watford, let to Threadneedle Pensions for another 131 years at a peppercorn rent, sold for £69,000 from a guide of £10,000-plus.
£100,000 to £250,000
At Allsop, a freehold retail and residential investment in High Street, Chard in Somerset, comprising two shops with flats above and part let to New Look at an overall rental of £28,600 pa, sold for £240,000, a gross return of 11.91%.
And a heritable retail investment in High Street, Fort William, let to a local sweet shop franchisee until 2020 at a rental of £10,000 pa, sold for £100,000.
At the Acuitus sale, a freehold retail investment in Sutton-in-Ashfield in Nottinghamshire, let to William Hill until 2026, with a break in 2021, at a rent of £17,000 pa and a vacant former office on the first floor comprising some 1,487 sq ft, sold for £205,000, a gross return of 8.29%.
At the Lambert Smith Hampton sale, a freehold plot of land with development potential in Wellsway, Bath, sold for £120,000 and provided an opportunity to develop one or more residential units, subject to consents.
£250,000 to £500,000
At Allsop, the second lot to be offered in the catalogue was a freehold shop and residential ground rent investment in Fulham Palace Road, Hammersmith, London W6. Let on the ground floor to a tenant trading as Chicago Grills until 2023 at a rent of £24,000 pa, it sold for £409,000, a gross yield of 5.86%, showing that you can easily buy investments in London below half a million pounds.
And an attractive freehold retail investment in High Street, Street, one of my favourite towns, let to New Look Retailers until 2019 at a rent of £35,700 pa, sold for £315,000, a gross return of 11.33%.
At Acuitus, a freehold retail and residential investment in High Street, Crowborough, let in its entirety to WH Smith Holdings with a parent company guarantee, until 2026 (with a break in 2021) at a rental of £21,200 pa, sold for £295,000, a gross return of 7.18%. Even though the two flats included in the lease had been sold off, it was still a very nice buy.
At Lambert Smith Hampton, a vacant freehold former public house in Risby, near Bury St Edmunds with development potential sparked enormous interest when it sold for £275,000 from a guide of £100,000.
And the property next door, comprising a separate vacant cottage and garden, sold for £195,000 against a guide of £35,000! But if both lots had been bought by the same buyer, they would own a fairly substantial development site was bought for a total of £470,000 with plenty of potential.
£500,000 to £1m
At Allsop, a modern freehold office investment in Thanet Way, Whitstable let to Capita Employee Benefits until 2021 at £90,000 pa sold for £885,000, a gross yield of 10.16%. Comprising 8,649 sq ft of offices, the property included 52 car parking spaces.
And a freehold industrial estate investment comprising 11 units at Hingham, near Norwich, was let to various tenants at a total rent of £88,795 pa and sold for £980,000, a gross return of 9.06%.
At Acuitus, a prominent retail investment let to Peacocks Stores until 2023 at a rent of £70,000 pa sold for £940,000, a gross yield of 7.44%.
And a freehold motor trade investment in Bradford, let to Europcar Group until 2031 at a rent of £35,000 pa, but with RPI rental increases in 2021 and 2026, sold for £592,000, a gross return of 5.91% from a guide of £540,000.
£1m-£2m
At Allsop, a freehold restaurant and residential investment in Ealing Road, Wembley, let on the ground floor to a tenant trading as Mumbai Local and an AST on the first floor, was let overall at £69,400 pa and sold for £1,300,000, a gross return of 5.33%.
And an attractive freehold retail investment in Stricklandgate, Kendal, let in its entirety to WH Smith Holdings until 2022 at a rent of £68,900 pa, sold for £1,060,000, a gross return of 6.5%.
At Acuitus, a modern long-leasehold multi-let industrial estate investment in Rochester, Kent, let as ten units at a total rent of £108,333 pa, sold for £1m, a gross return of 10.83%.
An attractive freehold bank investment in High Street, Skipton, North Yorkshire, let to Barclays Bank until 2026 with a break in 2021 at a rental of £140,000 pa plus vacant second-floor offices, comprising 1,251 sq ft, sold for £1,725,000, a gross return of 8.11%, which shows that not all bank investments sell for sub- 6% yields.
At the LSH sale, a prime freehold retail investment in High Street, Winchester, let to L’Occitaine until 2024, with a break option in 2019, at a rent of £70,000 pa, sold for £1,150,000, a gross return of 6.08% – a very nice investment.
£2m-£4m
At Allsop, a freehold retail and residential ground rent investment in Earls Court Road, London, SW5, with the ground and basement let to Holland & Barrett until 2021 at a rent of £120,220 pa sold for £2,240,000, a gross return of 5.36%.
At Acuitus, a substantial virtual freehold retail park investment let to tenants that included Poundstretcher, Next and Matalan for a combined income of £701,144 pa with a further vacant unit of 2,300 sq ft, sold for £3,700,000, a gross yield of 18.94% – a very interesting buy.
And at LSH, a freehold retail and residential parade investment in Didcot, Oxfordshire, comprising eight shops and nine flats and producing a total income of £108,500 pa, sold for £2,135,000, a gross return of 5.08%.
£4m-plus
At Allsop, their largest lot of the day was St Peter’s House in Victoria Street, St Albans. A first-class city-centre office investment, it comprised 22,089 sq ft of offices and was let to a charity and the secretary of state for a combined rental of £388,844 pa or about £17.60 per sq ft. It sold for £7,100,000, a gross return of 5.47% or circa £321 per sq ft in terms of capital value, as I am sure investors considered this an ideal opportunity for conversion to residential.
Nilesh Patel, director, Prideview Group
£250,000
It’s not easy to find quality investments at this budget, especially with so many new investors entering the market. We helped a young professional onto the commercial ladder with a bakery and flat in Leeds, let to Greggs on a five-year lease for less than £200,000 – around a 6.5% gross yield.
Nice London investments are a rarity at this budget and we did well to pick up a lock-up Pizza Hut franchisee investment in Bromley, south-east London at Allsop’s May auction for £265,000, a 6.1% yield. Despite it having only two years on the lease, the rent is sustainable and location a busy one.
£500,000
With a slightly higher budget one can aim for blue-chip investments with longer lease lengths, such as a new Betfred in Ipswich on a 10-year lease, which we sold privately in August for around £350,000, a 6% yield, or a Europcar in Bradford on a 15-year lease that we sold at Acuitus’s July auction for £592,000, a 5.6% yield. Both properties are whole buildings with ample car parking, making them quality buys.
If it’s a London lot you prefer then it will have to be a lock-up shop. We recently secured a blue-chip bookmaker with a few years remaining in east London for around £500,000, a yield of around 7%. A very attractive price with some risk, suitable for a portfolio investor and hopefully still available at the time of press!
£1m
This budget level is very popular with private investors. It can afford you a financeable, blue-chip convenience store with a long lease. These typically comprise a detached building with car parking and in a more affordable residential/out-of-town location, where these businesses prosper most.
Recent deals include a new Co-op Food in Dorset on a 15-year lease sold for £860,000, a yield of 6.6%, a Tesco Express in Gravesend with a break in three years that sold for £740,000, a 7% yield, a Co-op Food in Glasgow on a 15-year lease selling for £705,000, a 6.4% yield, an Iceland in Bournemouth with seven years until the break snapped up for £980,000, a 7.7% yield and an Iceland in Newmarket let for 11 years which we acquired prior to Allsop’s May auction for a bit over £1m, a yield of 5.5%.
£2m
As the budget level increases, we work with more experienced buyers who want investments with potential to add value. One such case is the beautiful Walkabout pub, part of Stonegate Pubs, in Bristol city centre with 19 years remaining for around £2.5m.
For almost 30,000 sq ft of property, the building offers plenty of long-term potential. Just outside Bristol we also bought (and financed) a neighbourhood parade of six independent shops and flats for £1.6m, a 6.7% gross yield, which we will also be asset managing for our client over the next few years.
Some investors still want hassle-free properties, and for one buyer who has been looking since Brexit we sourced a brand-new lock-up Sainsbury’s Local in Northolt, north-west London, on a 15-year lease for around £2m, a 5% yield.
£4m
At this budget we are talking investments or value-add/asset management opportunities in prime locations. We just acquired two adjacent lock-up shops including a Pizza Express on a 10-year lease in Notting Hill Gate, London for £5m, a 4.1% yield, with a rent review upcoming, for an overseas buyer.
At a similar price level but higher yield of around 6% we acquired a service station in the Cotswolds with a fantastic mix of tenants including Co-op Food, Travelodge, Texaco and Burger King, all with a weighted average unexpired lease length of 18.5 years. We are currently selling an investment-grade petrol station on a 20-year lease with fixed rental increases in the Midlands for around £4m.
We also sold a block of 18 flats let on a single commercial lease to a housing association on Kilburn High Road, north London for just below £4m, a 5.5% yield, at Allsop’s May residential auction. It has medium-term value-add potential, given that on lease expiry the landlord can reconfigure or refurbish the flats and break them up for let or sale.
This article appears in the latest edition of the Property Auction Buyers’ Guide, published by EG on 7 October. For free access to more content for private investors, register here for your free digital edition of the guide.
