I regularly eat at this restaurant, which is somewhat misleadingly named Buddha Jazz. It is usually busy, if not packed, and I was first drawn to it by gushing reviews on local blogs. Why, I wondered, is this property, with this tenant, such a risky investment that buyers are demanding a yield approaching 10 per cent? Buy-to-let investors in the same area demand a yield of only 5-6 per cent - and the costs of managing residential tenants are much higher.
One answer can be found in the Local Data Company's latest report on shop vacancy, revealingly entitled 'Too many shops'. LDC found that 14.6 per cent of shops in the UK are vacant, based on data from 506 town centres across the country. Vacancy is a useful measure of risk for most types of property. It means tenants can credibly threaten to move their business elsewhere, forcing down rents. And it makes properties hard to re-let. That's particularly problematic for commercial premises because empty rates are now payable on even the smallest properties, and because they cannot simply be sold vacant, as flats can, except at a huge discount.
The LDC report cites the familiar reasons for the current bear market in retail property: weak consumer spending, falling or flat house prices, the growth of internet sales, the supermarket 'space race' and widespread shop closures. Rents are being squeezed by both a structural trend - digital and mobile technology allows chains to reach the same number of consumers with many fewer outlets - and the business cycle.
But property is a local business, so this high-level national analysis is of limited use. Even the London region, with its much lower (and falling) vacancy rate of 10.1 per cent, contains myriad micro-markets. Wandsworth, a few miles west of Camberwell, has one of the highest void rates in the country, at 29.1 per cent. Tooting, further south, has one of the lowest, at 6.6 per cent.
Camberwell does not feature in the LDC report. But Benedict Gannon at Pedder, the estate agent charged with selling the property in Camberwell, says the "volume of vacant commercial space" is still weighing on the local market. This explains the high yield, he says, as well as the lack of debt finance and general paucity of transactions. "There's been almost no stock - those that don't need to sell don't, and those that do need to sell go to auction." Any shop in the area not leased to a national chain currently sells on a rental yield of 8-10 per cent, he reports. The Buddha Jazz premises are at the upper end of the scale because they lie off the main Camberwell shopping street.
The risk that the tenant leaves is not an immediate one - 14 years remain on the lease - so the high yield in this case must instead reflect the risk that it goes under. Investors can assess the likelihood of default by looking at the restaurant's annual accounts. In this instance, Companies House - the official repository of company data - is unhelpful, showing just a balance sheet with negative net assets for Buddha Jazz. But Mr Gannon says the restaurant has kept to its covenants, and that bidders can view up-to-date accounts.
Nick Gregory, joint chief executive of Local Shopping Reit (LSR), which owns a £184m portfolio of such assets, gives two reasons why Buddha Jazz may lie at the riskier end of the local-shop spectrum. First, the rent is high in absolute terms. He prefers smaller units with rents of £7,500 to £15,000 - the kind of sum "you can always find someone willing to pay". The many-roomed premises of Buddha Jazz would only ever appeal to a restaurant, limiting the pool of potential new tenants in the event of a default.
Second, he thinks restaurants are riskier than other retailers generally. This goes against the grain of what I hear from major landlords like Hammerson - restaurant groups have been among the most resilient performers through the financial crisis, and mall owners have been busy increasing their exposure to them. But Mr Gregory points out that independent restaurants have high fit-out costs -– often borrowed - that make them more vulnerable to a downturn in trading than, say, a florist or newsagent. "When Lehmans went bust, our restaurants went bust," he recalls.
One common solution to a vacancy is to seek planning permission to convert the space to residential, where space is usually tighter. But the council might refuse the application - there needs to be space for bin and bike storage, for example - and conversion costs of £40,000 are common. Mr Gregory reckons the conversion strategy only works in London.
Still, the Buddha Jazz property has attracted numerous bids at the asking price, reports Mr Gannon, and is currently under offer to a London private investor. The restaurant itself tried to buy out its premises, but could not raise a large enough mortgage - a familiar story in the current market. Where debt fears to tread, investors can buy property on the cheap.
