The Rent Review Specialist
No room for Doubt
29/04/2016
The stability of the commercial property market, indeed the property market as a whole, depends upon finance, the management of large amounts of money. Actually, it is not so much the stability that would not survive without regular injections, but the For further reading, please visit LandlordZone.
Gambling on the future
15/01/2016
Whenever I count from numbers 1 to 10. I find it easier to count up, rather than down. If you don’t know already, try this for yourself: count from 1 to 10: do you find it easier to…For further reading, please visit LandlordZone.
Investing in Commercial Property - (2) for Growth
23/12/2015
Commercial property is a depreciating asset whose rate of depreciation can be slowed or offset by appreciation over a period of time. For a property to go up in value between one date and another, one or more things would have to happen. The first question when buying for growth is why should your choice… For further reading, please visit LandlordZone
Are banks a safe bet?
26/06/2014
Not that long ago, one of the best ways to invest in a bank was through stocks and shares. As well as a slice of the action, you became a part-owner of… For further reading, please visit LandlordZone
Mortgage and Loan
01/01/2014
Even if they start by using cash, many purchasers are concerned with the cost of financing property. In my experience, they can often be more concerned with finance than the value of the proposition. This situation typically arises when property is offered at a high yield, compared with interest rates, but not high enough when measured on (traditional) investment criteria.
Depending on lending criteria, that may range from stringent to lax depending the lender's policy at the time, commercial mortgages can usually be obtained for between 40-70% of capital value, provided the cost of repaying the mortgage is covered by the rental income.
When a mortgage based on the value of the investment, as distinct from the property, and if the investment value has gone up, it may be possible to remortgage.
Where a rent is subject to early review or the tenancy to expiry (reversion), mortgagees will normally lend only by reference to the rent passing, but subject to the borrower's other resources and the relationship with the lender, it may be possible to extract extra funds in anticipation of the level of increase and its immediate effect on capital value. Once the new rent is established, it may then be possible to re-mortgage so as to release further equity.
The source of finance is important. Since the price of shop property can be substantial and may be beyond the reach of cash buyers, where would the money come from to fuel demand for shop property investments?
The answer is there is plenty of money about. You only have to look at the turnover figures for retailers and other businesses to realise how many GBP billions are in circulation. The criteria for bank lending is judicious choice of borrower. By lending (more) to fewer borrowers, the banks are doing what all forward-thinking businesses have been doing for years: moving away from the mass-market catering for everyone and concentrating on the more profitable customers/borrowers.
The amount of funds and facilities for borrowing determines flexibility. Income can be used to finance mortgage, capital can be released for buying a second investment and so on. If you do not want to borrow, then your purchase would be limited to your own resources, the price range and/or required initial yield, in which case decisions can be harder for fear that something better might turn up. The more you have to invest, the more flexible you can be. Even so, successful investment in shop property is not about spreading the risk, but buying wisely.
A wise investment is one that performs through thick and thin. Property performance is a measure of confidence. At any time the value of a shop investment is what other investors in the market at that time would pay, but how the value is calculated depends upon the terms and provisions of the tenancy and that depends upon the tenant’s agreement or if a dispute has to be resolved then the tenant’s conduct in the aftermath.
Depending on lending criteria, that may range from stringent to lax depending the lender's policy at the time, commercial mortgages can usually be obtained for between 40-70% of capital value, provided the cost of repaying the mortgage is covered by the rental income.
When a mortgage based on the value of the investment, as distinct from the property, and if the investment value has gone up, it may be possible to remortgage.
Where a rent is subject to early review or the tenancy to expiry (reversion), mortgagees will normally lend only by reference to the rent passing, but subject to the borrower's other resources and the relationship with the lender, it may be possible to extract extra funds in anticipation of the level of increase and its immediate effect on capital value. Once the new rent is established, it may then be possible to re-mortgage so as to release further equity.
The source of finance is important. Since the price of shop property can be substantial and may be beyond the reach of cash buyers, where would the money come from to fuel demand for shop property investments?
The answer is there is plenty of money about. You only have to look at the turnover figures for retailers and other businesses to realise how many GBP billions are in circulation. The criteria for bank lending is judicious choice of borrower. By lending (more) to fewer borrowers, the banks are doing what all forward-thinking businesses have been doing for years: moving away from the mass-market catering for everyone and concentrating on the more profitable customers/borrowers.
The amount of funds and facilities for borrowing determines flexibility. Income can be used to finance mortgage, capital can be released for buying a second investment and so on. If you do not want to borrow, then your purchase would be limited to your own resources, the price range and/or required initial yield, in which case decisions can be harder for fear that something better might turn up. The more you have to invest, the more flexible you can be. Even so, successful investment in shop property is not about spreading the risk, but buying wisely.
A wise investment is one that performs through thick and thin. Property performance is a measure of confidence. At any time the value of a shop investment is what other investors in the market at that time would pay, but how the value is calculated depends upon the terms and provisions of the tenancy and that depends upon the tenant’s agreement or if a dispute has to be resolved then the tenant’s conduct in the aftermath.
Good time to invest?
01/09/2009
It seems to me there are a growing number of people thinking to themselves now seems like a good time to invest in shop property. But I'm not convinced. Not because life's difficult for many retailers, and that for many struggling on in the hope of surviving is possibly about the best they can do, but that that the sort of property on the market for sale doesn't fill me with much enthusiasm for its investment potential.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.