Last year I wrote about ‘The Income Hunter’, a type of investor seen often at our commercial auctions who is in essence there to purchase an income stream. In more recent times, I have been witnessing the fierce emergence of a new type of investor, a more active and entrepreneurial investor, one who is actively looking for opportunities to roll their sleeves up. The Added Value Investor. For simplicity, as their approach generally incorporates lots of trips to the builders’ merchants or involves builders lets from now on refer to this investor as ‘Bob’.
Bob, generally speaking, when looking at opportunities is not satisfied to sit back and receive four cheques a year, a set level of income for a defined period of time. Bob stands back, considers and looks at his risk/reward curve and decides that yes he is happier initially to take on more risk and defer the potential reward 12 or 18 months down the line.
I am not at this point going to pretend that this type of investor, Bob, is a new concept. To the contrary, they’ve been around for years. What’s caught this bloggers attention though is that in our October Commercial Auction Bob didn’t turn up on his own in a car, Bob turned up by the coach load and each Bob turned up with intent and the determination that they would each be leaving the room that afternoon with a contract in their hand.
This excitement displayed by Bob I am convinced is not just a one off event being exaggerated by myself in order to make a little blog post. To the contrary, I have witnessed this ‘Bob Movement’ gathering pace over recent months to the extent I have had to ask myself the question why, what has changed in the recent past to influence this?
At this point, I could, like most commentators cry Brexit, but if we’re honest as Brexit hasn’t happened yet and Bob mainly operates in the domestic market, Brexit has made absolutely no difference so let’s look elsewhere.
Interest rates perhaps? Mr Carney and his mates cut interest rates in August from an unprecedented low of 0.5% to an even more unprecedented low of 0.25%, leaving us with little room to manoeuvre when inflation creeps in, which we are starting to see it doing through the recent Marmitegate scandal. Traditionally, as commercial real estate has been seen as a hedge against inflation due to regular rent review provisions this should spur on ‘The Income Hunter’ rather than Bob specifically, so Mark, for now, you’re in the clear too.
No, there is something else. Stamp Duty (SDLT) changes and the wider crusade by Her Majesty’s Government on Buy-To-Let investors (BTL). Since the spring, our friends operating in the BTL sphere have been pushed and squeezed tighter than you would be on the Northern Line at rush hour. They’ve endured higher taxes both upon entry and during ownership. Recently this sector has been staring down a nasty barrel and investors are getting frustrated. Through the changes to SDLT rates if you are looking to invest £500,000 in a flat to rent out you would be looking at paying £30,000 in stamp (up from £15,000 before the changes came in). Contrast this to Bob who with his £500,000 is going to buy a shop with vacant upper parts, ripe for residential conversion, at our commercial auction. Bob, through this route is looking at paying £14,500 in stamp (down from £15,000 before the changes came in). Bob, now very smug indeed, plans on using the £15,500 he saved in stamp on converting the upper parts into a flat, all at the same time while receiving a regular income from the ground floor shop.
I saw, first hand, this exact play being actioned by Bob on a property in Banbury which was sold at auction in October. The property in question was a charming, part listed building producing an income of £34,500pa and, importantly for Bob, it also had self-contained vacant upper parts, 1,800sqft of vacant upper parts to be exact. Now few things excite a Bob more than the words ‘self-contained vacant uppers’, so when the time came for the property to be sold, I actually saw Bobs’ tripping over themselves to get the auctioneers attention and bid. If the Bobs were a collective then that day they had a profound effect on the price achieved. The property sold for £665,000, a whole 30% higher than the guide.
On a recent inspection I happened to bump into a real life Bob, his name was infact Giles but he encapsulated this movement wonderfully when he said to me “Ben, I don’t buy in the 8%’s, I buy in the 12%’s or Vacant and then add the value by building or re-letting. I’m less interested in the income and prefer to look at what I can do to enhance its value.”
Thomas Edison once famously said “opportunity is missed by most people because it is dressed in overalls and looks like work” and although I suspect this is has proved true through time, today I think Mr Edison would have to rephrase this to account for Bob and his movement.
Notes to editor
Ben Hodge is a chartered commercial investment surveyor working in UK’s market leading commercial auctions team.
Acting on behalf of a variety of vendors including private and institutional vendors, Ben has dealt with both distressed and healthy assets ranging from the prime through to tertiary markets. The investors that buy in our auction room represent a global market ensuring the best prices are achieved for our clients.
The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer.
If you would like to get in touch with Ben or are interested in the auction room as a method of sale, please contact him:
firstname.lastname@example.org or 020 7543 6876