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Are tertiary investments recession beaters?By: Mark Sherwood, Vail Williams

Mark Sherwood, Vail Williams

Tertiary property is essentially the lower end of the market judged by building quality, rent, location and ability to attract tenants, although there is a grey area where it merges with the secondary market.

Tertiary includes sectors such as office, industrial and retail units, but also pubs, hotels, leisure property and land such as car parks.

The rewards
Even though it is lower end, a well-planned foray into tertiary can deliver returns of more than 10 per cent. But be warned: the market-beating potential returns reflect the risky difficulties of attracting the required finance and long-term tenants.

The benefits of tertiary are clear and simple: a steady income that may even gain capital value as the market shifts. That beats the returns from primary and most secondary properties – and much else.

Yields into double percentage figures compare very well to the relatively low finance rates, delivering a recession-busting, low cost hedge against much less rewarding alternatives.

The risks
But these advantages come at a price: the higher risk of properties standing empty and not just failing to provide an income but actually draining resources into business rates, utilities, insurance, refurbishment, maintenance and so on – it is not a risk properly understood by all.

Banks are often unwilling to finance deals at the bottom end of the market so the risk falls entirely on the buyer. Some tertiary investments can be very hard to either let or sell on, so doing the homework is vital to find something to satisfy tenants, their clients – and also their employees.

Expert advice
The top priority is the obvious precaution of making sure someone has actually signed the lease and has been regularly paying rent. To avoid being exposed to the costs of an empty building, that means narrowing the search down to opportunities where there is a sitting, and hopefully settled, tenant.

Buy more than one: tertiary is capable of high returns, but at a risk, and some sectors are more risky than others. Hedging with a portfolio of industrial and retail units can scale back potential costs.

Office property should be less attractive because it carries the extra costs of refurbishment for new tenants who may not even stay for long and could put a landlord over a barrel.

By comparison, however, the fitting-out of retail units is usually done by the business moving in, while industrial tenants generally take a more robust attitude towards the condition of the building.

By building a relationship with the tenant and being open to proposals such as subletting, a landlord may be rewarded with leases that last longer, plus more advanced notice to find a replacement.

Local knowledge and knowing the sector will give a better chance of success, and that might mean bringing in an expert. Location is vital, so while a shop unit in a low-ranking town might work, a big office building in a small village in Wales will not.

The rewards of tertiary can go as high as 13 per cent – but they are that high for a reason. It is wiser to limit the risk to one factor at a time and avoid being greedy by taking on a bad combination of a poor quality, empty building in an unpopular spot.

It’s vital to remember too that in 2018 it will be illegal to sell properties that still have an Energy Performance Certificate rated only F or G, so the costs of bringing it up to standard must be factored in.

Unusual opportunities may include pubs and hotels with long leases and good covenants. But be aware that strong parent companies do not mean strong operating companies – so financing the investment can still be difficult or risky.

First-time investors
The balancing act of making money out of tertiary property means that for first-time investors it is vital to get professional advice and properly understand the asset that you are buying.

Past performance and future rewards
Looking back six to seven years ago there was good availabilty and very strong demand for property, plus banks were supportive – but the returns on tertiary property were lower and the range was narrower. Over the last four to five years, however, yields have increased in range and size as the risk is recognised.

But demand for property may rise as soon as the next three to four weeks, as fund managers come out of bonds and look increasingly towards equities and property. This is likely eventually to bring capital growth to tertiary investments and makes it a good time now for sensible investments.  

About the author

Mark Sherwood is head of Vail Williams’ investment team. He buys and sells standing investments nationwide, advising on development funding and pre sales while also providing strategic portfolio advice. He advises a wide range of clients including many of the major funds and property companies, and is also retained by a number of overseas investors and UK-based high net worth investors. In addition to his investment role, Mark also provides valuations in relation to portfolios and individual assets and development advice.

Features April 2013

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