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Asset Strippers
Investment in shop property is very rewarding provided you know what you are doing. Many private investors, particularly novices, do not understand how to go about it. Instead of formulating and sticking to a clearly defined strategy, in which expectations for property performance respect business tenancy principles, most investors have a scatter–gun approach, alighting upon anything that takes the fancy within their price range.
A challenge for any investor whose source of funding demands that the passing rent should at least cover the cost of the bank loan is that, unless the timing of the purchase coincides with the bottom of the market or the proposition really is a bargain and not just dressed up to look like one, higher–yielding propositions rarely come with any chance of capital growth, or at least not enough to offset inflation.
Without capital growth, which to be maintained is a product of rental increase and pro–active asset management, rather than the vagaries of investment market momentum, the asset is likely to depreciate in value through a combination of inflation, non-recoverable costs during ownership, shortening lease term, shifting trading positions and multiple–retailer branch closure. In my opinion, most peripheral trading positions have gone ex–growth. The only trading position (by which I mean actual location, not tenant covenant) to buy into is 100% prime: anything else is on a hiding to nothing, a downward spiral in the making.
Whenever I’m asked whether I think the asking price for an investment property is reasonable, my stock answer is that property generally is overpriced by about 50%. The difference is in the value of the layer of borrowing that, by virtue of the difference between the value of a property with vacant possession and the same property let on a mortgageable lease, has come into existence because the banks are comfortable with lending against cash-flow. Go back in time before property was thought of as a store of value and in a bygone era the value of land, buildings, bricks and mortar was what the real estate could be used for by the owner, as distinct from what it might fetch if sold to someone that could afford to buy provided someone else would lend the buyer the money.
Buying covenant makes sense in the context of improving the chances of getting the rent in on time, but retailers whose financial standing counts for something in the investment market are not daft. Property–cost reduction and minimising tenancy–liabilities is the mantra. Canniness is apparent with the capital–releasing of ex–growth property using sale–and–leaseback where a building let to a well–known company on a long lease with rent reviews at regular intervals is a mouthwatering prospect, tailor–made for a mortgage, guaranteed to attract keen demand and commensurate price.
Unlike the local trader whose financial decisions are likely to be curtailed by resources, whether or not the tenant has a surveyor acting for him, so may cave-in under pressure, the multiple retailer is usually in a stronger position to argue and resist; most multiple retailers have more resources at their disposal than do many of their landlords. Consequently, surveyors acting for inexperienced investors against multiple–retailers in non–core trading positions know full well that the likelihood of the landlords’ rental expectations being met are going to be slim. Managing client expectations calls for a sensitive approach in the wording of recommendation, (a skill which incidentally isn’t something readily grasped by the generalist surveyor fraternity whose advice is dismissed by the landlord refusing to concur and instead instructing someone like me with a specialist perspective). Part of the difficulty is that despite my best attempts via my website – I’d like to think other surveyors too, even though a random search on Google does not reveal much attempt at enlightenment – getting the message across to inexperience that an “upward–only” review does not mean the rent necessarily has to increase has not permeated private investor collective consciousness. Instead, the investor having bought a low yield as a result of investment–market workings sets his sights on a rental hike that would increase the return on capital to a level commensurate with the self–perceived wisdom of the buying choice.
The flight from cash on deposit and derisory interest rates and/or the volatility of dividends from stocks and shares and/or the hassle of residential buy–to–let into the higher yields of a business tenancy and perceived rich pickings of shop property investment is not without risk. The commercial property market, of which shop property is a sector, is unregulated and a paradise for the shrewd. Asset stripping is not only the transfer between connected parties: it is also the extrication by the seller of cash liquidity from the buyer. It is said that a fool and his money are soon parted but surely the millions of pounds that exchanged regularly in auction rooms are not going to result in every buyer ending up feeling disappointed with their purchase? But why not? Why when auction–fever has taken over from the arguably more thorough due diligence of private treaty “subject to contract” should the excitement of bidding before the fall of the gavel not interfere with sound judgement?
In my opinion, the most important point to keep in mind when choosing a shop property for investment is that property is a depreciating asset whose rate of depreciation is only going to be counter–balanced and tilted toward prospects for growth if the host of factors and variables that generate growth are in alignment. It doesn’t take much for the subtle link between the location and/or trading position and/or terms and conditions of the tenancy to be out of sync.
A challenge for any investor whose source of funding demands that the passing rent should at least cover the cost of the bank loan is that, unless the timing of the purchase coincides with the bottom of the market or the proposition really is a bargain and not just dressed up to look like one, higher–yielding propositions rarely come with any chance of capital growth, or at least not enough to offset inflation.
Without capital growth, which to be maintained is a product of rental increase and pro–active asset management, rather than the vagaries of investment market momentum, the asset is likely to depreciate in value through a combination of inflation, non-recoverable costs during ownership, shortening lease term, shifting trading positions and multiple–retailer branch closure. In my opinion, most peripheral trading positions have gone ex–growth. The only trading position (by which I mean actual location, not tenant covenant) to buy into is 100% prime: anything else is on a hiding to nothing, a downward spiral in the making.
Whenever I’m asked whether I think the asking price for an investment property is reasonable, my stock answer is that property generally is overpriced by about 50%. The difference is in the value of the layer of borrowing that, by virtue of the difference between the value of a property with vacant possession and the same property let on a mortgageable lease, has come into existence because the banks are comfortable with lending against cash-flow. Go back in time before property was thought of as a store of value and in a bygone era the value of land, buildings, bricks and mortar was what the real estate could be used for by the owner, as distinct from what it might fetch if sold to someone that could afford to buy provided someone else would lend the buyer the money.
Buying covenant makes sense in the context of improving the chances of getting the rent in on time, but retailers whose financial standing counts for something in the investment market are not daft. Property–cost reduction and minimising tenancy–liabilities is the mantra. Canniness is apparent with the capital–releasing of ex–growth property using sale–and–leaseback where a building let to a well–known company on a long lease with rent reviews at regular intervals is a mouthwatering prospect, tailor–made for a mortgage, guaranteed to attract keen demand and commensurate price.
Unlike the local trader whose financial decisions are likely to be curtailed by resources, whether or not the tenant has a surveyor acting for him, so may cave-in under pressure, the multiple retailer is usually in a stronger position to argue and resist; most multiple retailers have more resources at their disposal than do many of their landlords. Consequently, surveyors acting for inexperienced investors against multiple–retailers in non–core trading positions know full well that the likelihood of the landlords’ rental expectations being met are going to be slim. Managing client expectations calls for a sensitive approach in the wording of recommendation, (a skill which incidentally isn’t something readily grasped by the generalist surveyor fraternity whose advice is dismissed by the landlord refusing to concur and instead instructing someone like me with a specialist perspective). Part of the difficulty is that despite my best attempts via my website – I’d like to think other surveyors too, even though a random search on Google does not reveal much attempt at enlightenment – getting the message across to inexperience that an “upward–only” review does not mean the rent necessarily has to increase has not permeated private investor collective consciousness. Instead, the investor having bought a low yield as a result of investment–market workings sets his sights on a rental hike that would increase the return on capital to a level commensurate with the self–perceived wisdom of the buying choice.
The flight from cash on deposit and derisory interest rates and/or the volatility of dividends from stocks and shares and/or the hassle of residential buy–to–let into the higher yields of a business tenancy and perceived rich pickings of shop property investment is not without risk. The commercial property market, of which shop property is a sector, is unregulated and a paradise for the shrewd. Asset stripping is not only the transfer between connected parties: it is also the extrication by the seller of cash liquidity from the buyer. It is said that a fool and his money are soon parted but surely the millions of pounds that exchanged regularly in auction rooms are not going to result in every buyer ending up feeling disappointed with their purchase? But why not? Why when auction–fever has taken over from the arguably more thorough due diligence of private treaty “subject to contract” should the excitement of bidding before the fall of the gavel not interfere with sound judgement?
In my opinion, the most important point to keep in mind when choosing a shop property for investment is that property is a depreciating asset whose rate of depreciation is only going to be counter–balanced and tilted toward prospects for growth if the host of factors and variables that generate growth are in alignment. It doesn’t take much for the subtle link between the location and/or trading position and/or terms and conditions of the tenancy to be out of sync.