Over the past year, an increasing number of commercial property investors have been taking advantage of the opportunities available in auction rooms. The Essential Information Group, recognised as the UK’s leading source of information and data on the property auction market, has reported that 3223 commercial property lots, worth more than £68m have already been sold nationally since January 2012. The average price of a lot is £212,178 and the most popular region for buying commercial property is the North West, followed by the South West.
Benefits One of the biggest appeals to commercial property investors is the typically longer leases that they have compared to that of residential property. Businesses are keen to establish a base for themselves and therefore will sign longer leases from five to 20 years. Commercial leases will also often require tenants to give up to six months notice if they are not planning to renew, giving landlords valuable time to secure new tenants.
Another appeal for those investors looking longer term is the higher appreciation that commercial property can bring. Some investors purchase property at auction below market value, hold on to it for a number of years and go on to sell it for a substantial sum.
The uses of commercial property are also far more wide reaching. The current lack of Grade A office space in city centres is a real opportunity for commercial property landlords. Older or second tier commercial properties can be bought at auctions and renovated to meet this demand, while also enabling landlords to charge premium rents. An increasing trend in the auction room has been investors looking to acquire commercial property to convert into residential dwellings and take advantage of the increased rental yields currently available.
Change of use is also becoming easier to secure planning for as the market is more open to converting empty commercial premises into residential space.
Tax breaks It's worth remembering there are also some good incentives and tax breaks available when converting commercial property into residential. In some cases refunds on VAT can be claimed on some of the building materials and conversion services used.
The flat conversion allowance, introduced in 2001, is intended to encourage the conversion to residential use of empty or under-used spaces above shops and other commercial premises. The scheme allows the investor to claim an initial 100 percent capital allowance on the cost of conversion as long as the associated conditions are met.
Funding When purchasing property at auction, buyers will usually only have 28 days to complete, sometimes it can even be as little as 14 days. This can be a problem if the buyer has yet to secure a mortgage with a traditional lender.
Short term finance or an ‘interest only’ bridging loan is common option for commercial property investors. Lenders will generally lend 70-80 per cent based on the valuation or the purchase or guide price. Investors can agree funding before, during or after an auction.
Another consideration is the cost of financing commercial property, which is generally higher than residential and usually requires a 30 per cent deposit. Some properties can also be subject to planning and use regulations – make sure these are checked thoroughly before you start bidding.
Auction tips Here are some auction tips for those planning to invest in commercial property at auction:
Research the market Attend some auctions to see how things work before bidding yourself. Many auction houses also have separate commercial property auctions with a wider variety of property types on offer.
Choose a location Choosing a commercial property for buy-to-let is all about location. Depending on your target market you will need to consider the proximity to a high street, the area and transport links. Check out the competition you will face using property sites. You will be able to see what rent can be achieved for certain areas and, over time, see which properties take longer to let and which areas are popular.
Check the legal documents These can either be downloaded from the auction house’s website or requested from the vendors’ solicitor. It is also recommended that you seek advice from your own solicitor as some properties may have covenants, which could have implications on how much the property is worth.
On the day of the auction, remember to take two recognised forms of identification, a cheque to cover the deposit, your bank details and solicitors’ contact details.
Do the maths All too often the excitement of bidding in the auction room takes over. Sit down and put pen to paper before you view properties and write down the cost of the property and the likely rental yield before you set your price ceiling. Don’t go above it!
Rental yield is a simple calculation, expressing the rental income as a percentage of the purchase price. Also make sure you have a contingency fund for when the property is not being rented and loan or mortgage repayments must still be met. Don’t forget to budget for repairs, which need to be fixed quickly, or else your tenant will vote with their feet.
Consider looking further afield Most buy-to-let investors only consider commercial properties near to where they live. While it’s easy to see why, your town may not be the best investment despite your inside knowledge. There may be other towns in need of commercial property, which you should seek out. Many buy to let property owners employ the services of an agent to handle tenants meaning that being local to the property is not so necessary.
Know the potential pitfalls Don’t ignore what could go wrong. How many months can you afford to pay the mortgage should the property sit empty? Will you require your money out quickly? A simple rule of thumb is to factor in the property sitting empty for two months of the year to provide a buffer.
Also, make sure you are able to cover the cost of a major repair not covered by insurance, such as the heating system, before you invest.
Bigger is better The important factor with commercial property is that value is often comparable to the net lettable area. In other words, the bigger the space, the higher the rental income as more commercial spaces are let per square foot.
Weigh up the benefits of improvements Get a survey done - some properties may require significant amounts of building work to comply with regulations. Factor in these additional costs and the price of surveys and conveyancing advice. Give careful consideration to the question of improvements to the property. Will the cost lead to higher rental income? How long will it take you to recoup the investment? It’s all about getting the balance right. If you do decide to make improvements, set a realistic budget and timescale.
Buying the right property at the right price at auction is essential in order to develop a portfolio and increase profit margins. Get it right and you’ll be on your way to success as a property investor.
About the author
Chris Baguley is director at Auctionfinance and has worked within the financial sector for over 17 years. He has overseen the growth of Auction Finance, which has proved successful with property professionals and investors who can arrange finance before, during or after an auction. Chris is a keen squash player and plays competitively in the North West of England.
Have you any commercial property events you'd like to tell us about? It could be networking, exhibitions, seminars, industry lunches or sporting fixtures. We will list them for free. Just email newsdesk@propnews.co.uk with the following details: Event name, date, time, venue, cost, booking info and a brief description of the event.
To list your property job vacancies on Property News. Email: richenda@propnews.co.uk.
RSS Feed
