Tuesday 28 March 2017
Thinking of diversifying into Commercial Property in Clapham?
Adding value is key in property investing. Following this ethos investors are now moving from comparatively expensive residential property to commercial property. There is relative ease in adding value as there is less competition. They can buy cheaper for starters...
Crescent House SW4. This old office block was bought for £4 million in Feb 2012 and resold for OIEO £13 million two years later when PD came into force. 38 units will be built and a quick count on their website tells me phase 1 (13 units) is selling at a total GDVof £12.5million.
But I don't want to rent out an office block, you say? You're right, there's less yield in straightforward buying of an office block and filling it with commercial tenants. There's a lot of uses for commercial property, and a lot of types; let me discuss a few and it may get your juices flowing.
Types of property
A commercial property could be anything, from shops (with flats above) to purpose-built office blocks, gyms, churches, warehouses and so forth. Essentially anything you wouldn't live in.
There is a big why of course... financial gain. You see, simply the act of getting planning permission to convert something into residential can substantially boost the value. This is known as Commercial to Residential Conversion.
Commercial properties are valued on their rental income. Thus if there is no tenant the value plummets. Time to swoop in. Empty office blocks can actually be converted under "Permitted Development," a simpler form of a planning application which cannot be refused. There are no minimum space requirements, so the developer can increase the margins by building more, smaller units. They don't have to be a minimum of 50sqm like when you apply through the regular process. Same goes for old warehouses, churches, factories, you name it.
There are a number of ways to make money out of a development, and actually building it is only one of them. To draw a more common comparison: if you had a house with a corner plot and you employed an architect to submit plans for another house next door you've essentially made a handsome capital gain just for shuffling some papers and a few pounds in fees. You could, theoretically, build it out for the most gain, but if you are good at spotting potential you could make handsome profits without the lengthy building process - let the developer take care of that if it isn't your cup of tea. I used a residential example here because you may very well have seen this locally but the same applies to other buildings. The planning permission increases the value - IF you can get it! Ihave seen some very cheeky plots of land in various auctions with some clever CGI pictures of a "proposed development" but without any actual planning permission (which may never materialise for one reason or another), so be warned!
Shops and uppers used to be very popular because they were cheap. The shop was let on an FRI lease (full repairing and insuring) and the commercial tenant would take care of everything. A low yield, but very stable, nearly guaranteed and no management fees. They have come back into demand because clever investors have started reducing the shop floor space and changing the rear of the shop (ground floor) into another residential flat - after all, residential property is more valuable (price psqft). For the sake of little more than a partition wall there are handsome gains to be had.
As with anything there are pitfalls and commercial property is certainly not for uneducated. If the property you are planning to buy is vacant, and you can convert it, great. What if you can't though? You will have to make sure that a commercial tenant is placed; without rent coming in the property is only worth the bricks and mortar it is built with as commercial lenders will often not lend on a vacant property. Commercial tenants are a bit more difficult to come by than your average tenant for a 1 or 2 bedroom flat. If it's empty you will be liable for business rates, which can sometimes be astronomical as it's normally priced by the square foot! Not getting the number of units you thought you would out of it and underpricing the build costs are two other main factors that will influence the end value of the development.
If you are interested in hearing more about commercial conversions then do stay tuned for more, I have a number of speakers lined up for later in the year at the Clapham Property Meet and we'll certainly be talking more about this subject.
My expertise is, as you may already know, in residential buy to let, specifically in South London. Do you own properties that you think need some tweaking in order to get the best out of them? Perhaps you don't own any yet and don't know where to start? I have built entire portfolios for many of my clients and they are very happy with the returns they have been able to achieve. Residential property lettings gives a stable return and as I invest in South London you will know that the capital appreciation is fairly predictable and resilient in tougher economic times. If you are looking to invest or improve your current portfolio touch base via email and see how I can help you today.
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