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BITE SIZE

2nd June 2020

I have just been to see a commercial building, which we will probably agree the deal on.

The property is freehold, and consists of about 3,000 sq. ft., and 60% is commercial and the rest residential.  It’s a good shape and very close to the station and amenities.  It is in an area which was known for its roughness and crime, but over the last couple of decades has becomes gentrified, and now it is occupied by affluent professionals.

The aim for the building would be to convert as much of the commercial space as possible into residential, and thereby minimise the commercial element.  This makes the commercial section more rentable.  Retail on the High Street is being hammered, even prior to COVID19.

It’s extremely difficult to rent out commercial, especially large lumps, therefore reducing the square foot helps it to become desirable; especially considering if it is below a certain amount in rateable value there is a business rates exemption.  This makes the premises attractive to a small firm.

Once this planning has been achieved under permitted development, we would look to implement the planning and build out the flats.  As the location is very strong we would expect a strong rise in value, as we would have managed to obtain two flats within the existing fabric of the property.

Simultaneously, we would hope to rent the commercial element as well.

Once this has been achieved, we would look to refinance the building and extract the original funds – and hopefully some more.

And, once this has been achieved, we would then go down the route of conventional planning, for extra square footage.  This would be on the roof and to the rear; and perhaps the basement as well, as there seems to be another 5-600 sq. ft. to be gained in this area of the building.

Planning is an uncertain process, so as long as the building has been stabilised, and is producing money, we can afford to bite the planning process in bite size chunks and ride it out.

It is never a good idea to be dependent on the conventional planning process exclusively.  Your fate is in the hands of councillors’ whims.  They are often ill informed of planning policy, and driven by the sentiments of their constituents.

Commercial property is attractive for several reasons.  Firstly, you do not pay the 3% premium as one would with residential property.  Secondly, you can purchase with tax free money via your pension fund.  Thirdly, you can repossess with minimal hassle, unlike residential.  Fourthly, you are not caught up with the Section 24 tax.

For this reason many investors are focusing on commercial property.

Suresh Vagjiani

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