Gearing Up

We are in an inflationary environment; this means the real purchasing power of money is decreasing every day.  Currently, they say we are at 9.1%, the highest in 40 years.  However, there are many metrics to measure inflation, and within this there is much room for manoeuvre.  I would suggest we are in a higher inflationary environment than the picture being painted for us.

What’s interesting is the effect this will have in property prices, and debt.  In this kind of environment, real assets will go up – such as property.  What’s interesting is debt will decrease in real terms, for example, if you owe £100K and inflation is running at 10%, in a year’s time you will still owe £100K, but the purchasing power of that £100K would have gone down to £90K, of course you would have interest to pay against the money borrowed, but overall you have gained in an inflationary environment by having debt, as in real terms it decreases.

As time goes on business will be squeezed hard, many many will fold, thereby there will be a dearth of empty commercial properties on the market.

This will provide an opportunity.  Many property companies typically based in BVI, purchased commercial properties purely for the rental income. Unlike residential commercial properties gain their value based on the tenant in occupation.

When they vacate, the value is diminished.  It surprising how much by; an empty commercial property in a town centre location could go a for third of its occupied value.

There was a deal we were monitoring, it was in Swindon Town Centre with Specsavers and Boots as its tenants.  This gives one an idea of the strength of its location.  The property was owned by a Jersey company, purchased for £450K in 2017.

When a property is empty, the business rates then revert to the landlord, along with this the insurance get hiked up substantially.  Therefore, instead of an income producing asset the piece of real estate now becomes a liability.  For an analyst sitting behind a desk offshore in his ivory tower these are just numbers on a spreadsheet, and from being positive they have dipped below the axis and have gone into a negative, therefore time to offload.

The property was placed in auction and went for £154K.  This was a vacant property consisting of 3,900 sq. ft.  A quick calculation shows 5 flats can be developed inexpensively.  At a value of £150K per unit this means the site will have a GDV of £750K.  I would estimate no more than £50K per flat to convert.

This is a model one will see time and time again with increasing rapidity.  Therefore, there will be money to be made in the coming times.

However, interest rates will need to rise to keep up with inflation.  This will impact the borrowing rates to do these types of developments – if of course you’re borrowing.

It will be interesting to see the effect this will have on the bridging market, as bridging has become very competitive, and rates are very keen for the product you are getting.  We will be keeping a close eye on this sector.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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