In the Allsop’s commercial auction there are a load of properties occupied by Santander, all on short leases, with little prospect of renewal.
The first lot is one in the city centre of Chingford, with 4 years remaining on the lease. The yield is 6.71%, and the guide price purposely low – in my opinion – at £350K. This is designed to bring in the masses by dangling a carrot.
In effect you are buying a 4 year bond, where the value of the bond at the end of the term is likely to be only a fraction of the original purchase price. The end value of an empty commercial property will not be very much.
The first auction lot is when you generally have the most interest and attendance in the auction room; therefore, the first lot has been chosen to set the tone for the rest of the auction. At this price and location this lot is likely to attract a lot of interest, and go way above the low guide price.
There will be many frustrated failed bidders off the back of this first lot, thereby setting up a pool of bidders for all the other lots yet to come.
Commercial property values, especially ones which are out of London, are governed by the tenant and the length they are in occupation. Many owners of commercial properties do not know what to do with an empty commercial property, apart from rent it to a commercial tenant. Their lines of funding also compliment this approach.
In the current climate this is not an easy proposition, and perhaps may not be for many years to come.
Therefore, you will see a dumping of commercial properties with shortish leases mostly via auctions.
Here is an interesting example, which illustrates the point raised above, that I have been looking at. It is Lot 63 in the Allsop’s auction. It was purchased by a property company based in London for £450K in 2015. Presumably, with a reasonable income and purely for the purposes of the income. The location is on the high street in Yeovil, Somerset; where there are many solid commercial tenants nearby, such as Vision Express, Robert Dyas etc. The property is double fronted consisting of 3,800 sq. ft.
As the property is currently vacant it has been guided at only £110K, and I don’t think it will go for much more than this. The reserve will be around the same level as the guide.
This property will be selling for about 25% of what it was purchased for in 2015. Kind of ludicrous. However, this also presents an opportunity. Conversion to residential is possible under Permitted Development. No doubt this is not London. Flats here go for about £150K a piece, therefore, there is potential to get about 5 flats within this building and a smaller commercial unit which is more rentable; giving a GDV of £750K for the residential alone. Conversion costs for the flats would be about £250K, giving one a heathy return. Even if you cannot sell the units on, you have the option of renting and refinancing your money back out of the deal.
These sorts of opportunities will be increasing in the near future, and there will be a window for making lucrative returns.