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Learning about sustainable income from the investment front line

The front line has taken on a new meaning in the last few months, and whilst those essential workers are hard at work at the forefront of keeping the country healthy, the Private Investor community remain keen to buy assets and gain income.

The auction market has been active, despite volumes falling and £65m was transacted in our March and April auctions, as we quickly migrated to fully online platforms for both commercial and residential sales.

For the Private Investor community, who have invested for income, this economic phase of lockdown has hit their incomes in two ways – their rental income and from dividends, with some 45% of UK companies cutting or halting their dividend payments in early April.

Rent collection rates across the commercial sector for the March quarter have been challenged and as this is written predictions for June vary widely, although the unwinding of lockdown should bring some relief.

Investors such as charitable foundations have cash reserves, and these buyers are becoming more prominent in our sector, with a very clear focus on buying sustainable income.

Sustainability in this respect has focused their minds on the basic human needs of health and convenience, alongside the traditional grade A covenant and long leases that are always popular but have become rarer commodities for the Private Investor to access.

Health can be interpreted in many ways, but for the Private Investor with a budget under say £5m, it means pharmacies, small GP practices, opticians and dentists that may or may not be on the High Street.

Pharmacies have, from the very first scenes of this pandemic become ever more the focus of community life, in a way that traditional shops tempting our discretionary spend simply cannot be when times are tough. To some they provide a lifeline and have a reliable, repeat customer base ranging from young families to the elderly who need their regular prescriptions which underwrites the business model. In easier times they will quickly morph into high street shops selling high margin cosmetic goods, toiletries and off the shelf medication.

Licencing is another key factor – the number of pharmacies and doctors’ surgeries within an area is regulated by the NHS and this tight governance means the creation of new licences or re-location of existing ones to new premises is strictly controlled. From a Landlord’s perspective, this limitation of supply helps provide stability and perhaps the prospect of mid to long term rental growth.

Our recent auction results reflect this demand, with some of the strongest yields on the day in the pre and post lockdown sales being paid for Boots’ pharmacies.

Lot 1 in February 2020 in Morden, sold at 3.8% NIY. Post lockdown, in the March 31st sale Lot 1, in Halstead, Essex and Lot 2 in Worcester Park, Surrey were both let to Boots and sold at 4.4% NIY and 4.1% NIY respectively, showing little sign of weakness in these instances of High Street sales.

Looking away from the health sector and the high street, convenience stores both stand alone and as part of petrol stations, remain highly desirable despite the motor industry undergoing evolution.

We have witnessed the continued trend of grocery shopping being increasingly carried out on a top-up/when required basis and during the lockdown this sector has proved to have the inbuilt resilience of being a basic human need.

These assets combine key features that appeal to the private investor: prominent roadside frontage – we all believe that we will keep driving, an inelastic demand for fuel whether carbon based or not, and convenience shopping.

If the electric car is the future, the increase in duration of ‘pit-stop’ for re-charging as opposed to re-fuelling will result in longer customer dwell times and could present further opportunities. Whatever the fuel of the future, with an improved convenience store offering, drivers are highly likely to add to their bill be it through the addition of a coffee or that evening’s supper.

We have sold £18.58m of roadside and in town convenience stores this year to date with one highlight being a petrol station and store in Temple Cloud, Somerset, which sold for £1.28m after intense competition. With the lease guaranteed by an established, +£90m net worth company, this gave a meagre 5.25% yield to the buyer, but with security of income until 2034 along with annual rental fixed increases of 2.5%.

Since lockdown the stand alone Convenience store sector has seen yield compression in the light of this intense demand, as we have achieved prices of 5.2% NIY for shorter income where break clauses are as early as 2024 – one example being Lot 8 in the May sale a former pub, now a standalone Co Op, which sold prior at £810,000. Clearly the buyer is happy to look way beyond this early break clause, gaining comfort in this busy sector, where the rent payments have been uninterrupted.

Few other sectors can show this level of demand in these straightened times and who can doubt the instinct of the Private Investor to protect their ability to derive income?

If you would like to get in touch with George, please contact him:

George Walker

Partner & Auctioneer Commercial Auction

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