Take local shops, which featured heavily in the Allsop and Acuitus property auctions last week. We read almost weekly about retail chains declaring bankruptcy, often as a tactic to renege on long leases signed in the boom years. High-street multiples closed outlets at a rate of 20 a day in the first half of 2012, according to research by consultants PwC and the Local Data Company. Who is buying shops in such circumstances - and why?
At the Acuitus auction, palliative-care charity Sue Ryder sold four of its outlets with 10-year leasebacks. One, in a suburb of Whitstable called Tankerton, was bought by North London independent financial adviser Richard Kafton for his Sipp. He paid £146,000 for an annual income of £10,000 - a rental yield of 6.73 per cent (net of costs). "Bearing in mind what's going on with cash that's a fair income," he told me in what became a familiar refrain.
Crucially, Mr Kafton did not buy the shop because he's bullish on the UK economy - quite the opposite. "I reckon we're still in for another five years of recession. Equities have a good yield, but I don't think the value will go anywhere. There's too much political and economic uncertainty." Meanwhile, Sue Ryder is a "solid covenant", he stresses. "I don't think there's much risk with this one." Roughly 70 per cent of Mr Kafton's Sipp is now in direct commercial property, with the rest in cash.
The irony is that IFAs typically recommend commission-paying funds rather than direct commercial property. But perhaps that will change in January, when kickbacks on financial products are banned and brokers have to start charging directly for their services.
Another Sue Ryder outlet, in the Sussex tourist town of Rye, sells for £309,000, giving a net rental yield of 5.87 per cent. The winning bid came from a company that has bought half a dozen such properties over the past five years and sold nothing. With no debt, its strategy is to buy assets when the existing portfolio generates enough cash. "We're using funds that are earning nothing in the bank," says the buyer. He has not visited the shop - with a well-known tenant and central location in an affluent town he deems that step unnecessary.
There were more small shops for sale at the Allsop auction, including nine in commuter-friendly Epping. The first three units, in a single parade, were identical apart from the tenant, with annual rent of £26,410 each. The first, occupied by Ladbrokes, fetched £350,000, while the second, let to a small chain of tea rooms called Belgique, was bought by a couple from South Croydon for £325,000 – clearly demonstrating how commercial-property values depend on the tenant. Why didn't they buy a London flat instead, I wonder. "It's really because of the full repairing and insuring leases - the tenant has to look after it," says the gentleman. But are they not concerned about the weak retail market? "One is always concerned."
They can probably afford to relax - according to the Local Data Company, Epping has one of the lowest vacancy rates in the country, at about 2.2 per cent. That's no doubt one reason why eight of the nine Epping units sold in the auction room, with the remaining one snapped up immediately after.
Another reason was their manageable size - at both auctions, bidding was noticeably more cautious for anything priced above £1m. Debt, often needed for larger purchases, is now scarce, and more expensive properties, priced off more expensive rents, come with a greater risk that the tenant regrets signing the lease. Larger properties can also be more complex, with multiple tenants, vacancies and conversion opportunities making valuations more subjective. "The days of people coming in off the street and buying something just because they thought it was cheap are over," says one property specialist who bought a multi-let industrial estate in Amersham for £1.4m - an eye-catching net rental yield of 11.3 per cent.
Even for single-tenant, freehold transactions, private investors face the difficulty of estimating how sustainable the rent is. The great appeal of the Sue Ryder shops was that the charity itself had set the rent this year, presumably at an affordable level for even the toughest retailing conditions.
As usual, private property investors need to be selective and do some homework – ideally using inside local knowledge. But there are clearly shop investments out there that combine strong cash generation with a reasonably low level of risk. There's none of the debt that pumped prices up in 2005-07, and sellers are more willing to compromise than a year ago. The Allsop auction, spread over two days, was the largest of its kind since October 2006. For Capital Economics - a consultancy better known for its bearish views - that "supports the growing sense that sentiment towards the commercial property market may be at, or close to, a turning point".
