Commercial property riches… even during a recession
I’ve just been reading an article in the Telegraph. They’re predicting a wave of failures within the commercial property market as a result of the deepening recession.
Fresh on the heals of the collapse of Modus Ventures, a Manchester-based retail property company, they claim that property failures to date are just “the tip of the iceberg”. They quote Richard Fleming, UK head of restructuring at accountant KPMG, “We predict a wave of fallouts in the commercial property market as the true value of losses becomes apparent.”
Anyone reading the article would be forgiven for thinking that investors should steer well clear of commercial property for the foreseeable future. However, I couldn’t disagree more. You see, a year or so ago I realised that the residential market was on the brink of collapse. I searched long and hard for an alternative source of investment income and eventually realised that commercial property was the way forward.
Now that may sound crazy in the current climate but bear with me here. The main driver behind the difficulties in the commercial investment market is the increasing number of failures within the retail sector. In other words, if the tenant renting your commercial property goes bust, you’re saddled with a vacant premises. Without a steady rental income, it becomes impossible to cover mortgage repayments and eventually the inevitable occurs… you go under. I recently received a stark reminder of how volatile the market has become when I met up with an old acquaintance of mine. He’d owned a commercial portfolio worth over £10m but this consisted of just five properties. The recession claimed three of his tenants in quick succession and it didn’t take long before the financial burden of three vacant properties took its toll. He lost his entire £10m portfolio almost overnight.
The sad truth of the matter is that this increasingly common scenario can be avoided if you choose your investments carefully. Supermarket chains such as Tesco and Sainsburys are doing extremely well despite the downturn. The takings at low cost outlets such as Lidl and Aldi are actually increasing as a direct result of the downturn. McDonald’s, KFC and other fast food chains are also benefiting from these leaner times. So if, as a small investor, you can a attract companies like these as tenants you’re on to a winner. Firstly, the covenant is extremely strong… let’s face it, Tesco are fairly unlikely to go bust anytime soon. And secondly, the investments are an ideal size, normally around £1m and perfect for your SIPP. So investment values are robust and fairly easy to fund, even in these challenging times.
As a consultant to Forshaw Land, I spend my days searching for development sites suitable for tenants such as Tesco. I obtain a 15 year agreement from the retailer, gain planning consent and develop the site. I’d say that an average site may cost around £700,000 to develop. Once it’s complete it’s usually worth at least £1m. So at that point we have a difficult decision… sell the investment at a substantial profit or hold on to the property safe in the knowledge that the rent will be paid, in full and on time for the next fifteen years.
So, the big boys may be struggling. But for us smaller investors, the commercial market can still prove to be a goldmine.
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Hi Lyndon
Love your site. Quick question if that’s OK. When you talk about being involved in commercial, are you just talking about being involved from the point of view of land buying?
IE. You’re not investing or developing existing commercial buildings / sites?
Thanks
Matt.
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Lyndon Forshaw Reply:
April 22nd, 2010 at 9:24 am
HI Matt,
Yes I’m involved in sourcing and developing commercial opportunities but in the current climate they need to have a clear exit. Either a pre-sale or a pre-let in place – preferably a strong covenant.
Regards
Lyndon
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