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Batten down the hatches

26th January 2020

Currently, we are analysing a property in South London, which consists of about 2,500 sq. ft.; about half of this is residential and the other half is commercial.  It is close to a station and the commercial comes vacant, which is good, as you have the ability to convert most of it into residential.

Generally speaking, it is good to leave the front portion of the building as commercial, as this is classed as Zone A and is the most valuable component of a commercial building.  There is another advantage which is the rateable value will be below £15K; this means there will be no business rates.

This puts this commercial property within the realms of affordability.  The services which will survive are services such as coffee shops, hair and nail salons etc.  When looking at most small businesses, especially in good areas of London, by the time the owner has paid the rent and the rates one wonders how they turn a profit.  In the current situation, the numbers of forfeiture of commercial leases will rise and continue to rise in the coming years.  The current bailouts and incentives are nothing but sugar coatings.

It is therefore imperative that any tenancy you put in place is mindful of the way the terrain will change in time to come.

There are ways to secure tenancies.  On the residential side, you can, for example, let to a council tenant who will continue to be on benefit for the rest of their lives; I appreciate this does come with its own set of problems.  Another is to attract a key worker tenant, they are unlikely to be losing their jobs in times to come.  Both of these can be wrapped in an insurance policy as long as they can pass the referencing.  We are working with an insurance policy provider who will pay out when the rent has not been paid for two months.  They will also cover £100K of legal fees for evictions, as well as the void periods whilst looking for another tenant.

These are some basic guidelines when looking for a tenant in the market; we ourselves are following the same route for our landlords.

On the commercial side, who you are agreeing the lease with is very important.  Many of the big companies have a separate company away from the trading company to enter into leases.  This means the main trading company is not whom you are giving a lease too; and if push comes to shove, many of these companies are geared up to draw out issues and they have the bank balance to fund disputes.

This is not the case with a couple who are looking to start a business, who give a PG and their main house is on the line.

Traditionally the big company was seen to be a more desirable tenant.  From a funding point of view they can help you gain a higher valuation and unlock more from your investment.  But when things get rough, you may find the Mr & Mrs business will be more likely to pay.

In both situations one needs to lift the bonnet and look underneath; e.g. is there a house in the background?  How much equity is on there?  Should I place a restriction on the title etc.

Regardless of rain or shine, there will always be a strong interest in property.  In previous times of turbulence property prices rose as money sought a safe haven in uncertain times.

Suresh Vagjiani

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