WHEN THE NUMBERS SPEAK FOR THEMSELVES
3rd December 2019
Currently, I’m looking into a commercial property. The environment in many ways is unfavourable to residential investment. Although of course, residential property investment does have its place. The persecution comes from two angles, one is the amount of legislation surrounding BTL properties. There are 160 pieces of legislation one has to comply with – these also increase constantly. The other is from the onerous and unfair taxation applied to rental property.
For those of you who choose to manage a property, beware, all you need is one tenant who knows the laws better than you. Not hard to find. I remember managing properties in Edgware Road under Westminster Council, most of the tenants were DSS tenants. This was just after the credit crunch. Bankers, traders didn’t have jobs. These would have been the clientele for top end penthouses. The DSS tenants no longer wanted 3 bed ex council houses, they were in the market for and getting top end penthouses. I particularly remember a tenant negotiating for a penthouse in a new development in Paddington’s West End Quay. Many of the tenants I came across seemed to have developed an almost encyclopaedic knowledge of how to manipulate the legal system in their favour. Not difficult, as most of it’s written to protect the innocent tenant from the vicious landlord.
Commercial property, unlike residential, has reduced stamp duty on entry as well as some interesting angles to do with parking pension funds, not to mention the ease of rent collection, the simplistic eviction process, etc.
So, we have been analysing commercial deals.
The deal we are looking at currently has a ten year tenancy in a strong commuter belt town.
What makes this deal interesting, is not just the deal. It’s the financing which wraps around it. Currently, we have rates which are very low, both on the residential and commercial side. The deal yields 6% which is strong given the strength of the tenant and the location.
A lender who has been looking at this deal has come up with a 5 year fixed rate at 3.48% on a 50% LTV basis. On these rates, your actual return on capital comes to 9.34%.
This is exceptional given the location of this property. The tenant is unlikely to vacate during this period. The rate won’t move, so at the end of 5 years you have almost 50% of your investment back.
The numbers stand on their own heads. This deal sells itself. It is self evident.
In addition, there is a development angle to this deal. There is potential to add a couple of floors to this property. When this is done you would expect an uplift, and thereby potentially be able to get a large chunk of money back out of your investment; thereby leaving even less in the deal.
A veteran of the property market explained the situation to me. He said there has never been a time in his experience when both the property market has taken a dip and the interest rates have been so low. This is like a rare astrological occurrence, an alignment of stars.
We have in our possession a valuation report done on a property very close by. It’s an indepth report which sheds light on rents achieved in the locality, and the calibre of the population in the town.
It only serves to reinforce the deal. We are currently seeking investors for this project. Please call the office if this is of interest to you.