For those who have bought at any of our auctions over the last five years, the buyers’ questionnaire will be a familiar feature of the process. We have assembled data from hundreds of purchasers during which we have raised £2.1bn from 3,650 lots sold.
Higher-value assets remain popular and in the last six months, which cover four auctions, we have sold 96 lots at above £1m. Notably, though, we have also seen a 20% increase in buyers with up to £1m to invest.
Many of these are looking to build a portfolio of commercial investments, having already had success in the residential world.
“Does the tenant really take on the repairs?” is a common question raised by these investors when looking at a commercial building let on a full repairing lease.
“Do I really just send a quarterly invoice?” This will be familiar territory for most, but these investors do sound like they have found the key to the magic box of net income and consistent long-term yields.
Are they being pushed or pulled?
The last Government revised the tax treatment on privately held residential assets to reduce investor appetite for the residential sector and by spring 2017 this will be fully phased in.
The increase in Stamp Duty by a further 3% on second residential properties has added £15,000 to the cost of a £500,000 purchase.
By spring next year, higher-rate tax payers can only deduct interest from residential rental income at a rate of 20% rather than 45%. Put simply, a high earner with borrowings of 75% or more will make little profit on an annual basis from income, before any repairs or void periods are factored in.
Our analysis shows an average gross yield on residential lettings at auction of 9.1% for 2015. Netted back by 25% to account for fees, repairs and voids, this gives 6.8% which compares to the average retail yield of 6.5% for the same period.
So, with comparable annual yields (albeit with significant regional variations) the real draw must be the longevity of the income.
Take one example: a Clarks shoe shop let at £36,000pa in an attractive Dorset market town. We sold this in our July sale at £500,000 to a local investor, and the new ten-year lease gives the buyer solid income until 2026. In that period, they will simply need to send out 40 rental invoices.
This calculation assumes a flat income stream, ignoring the possibility of increasing the rent to prevailing market values in 2021.
In this period an initial investment of, say, £520,000 allowing for costs will generate rent of £360,000.
NatWest currently offers 0.5%pa on savings of £250,000 or more, so in 10 years £520,000, even with compound interest, would grow to £546,000.
Investors also tell us that nearly a third intend to use finance, which makes returns even more compelling.
At 50% LTV with finance costs of 4%pa, the return on cash invested, now just £270,000, would be £260,000 or just over 9.5%pa without factoring in any rental growth.
So investors are finding returns on commercial assets very attractive. By realising some of their significant residential gains over the last two decades – via refinancing and perhaps some disposals – their transfer into the commercial sector can make a lot of sense.
Building a portfolio in this way creates diversification and allows these investors to increase their returns, build more resilience into their income and stop worrying about boilers!
Read more on auctions in the Estates Gazette Auction Buyers’ Guide