Demand for commercial property investments is extremely strong in 2016 with a surge of investors chasing each property which comes to the market. This is particularly the case in the secondary market, for lot sizes between £0.5 m and £2.5 m.
Cash which is not earning on the money markets with base rate held at a historic low for such a long time has investors turning to ‘bricks & mortar’ at an uncertain time for stocks and shares. GDP is forecast to decrease in the coming year and the impact of the China economy slow down and Brexit effect is anchoring the FTSE.
Investors seem to be quite prepared to take increased risk to acquire property as a consequence. High prices are paid irrespective of location and income security. The auction houses report 90% to 95% success rates in the sale room and nearly all private treaty sales end at ‘best bids’ in the market place.
As an example, Drake Howard Property recently chased an industrial investment in a secondary location for a client. Let to three tenants of poorer financial status; secured on leases with no more than 2 years remaining and; slightly over-rented. The property went to best bids and our offer of £820,000 was topped by some margin. The successful purchaser paid significantly in excess of £900,000 to show a return of 7.2% after costs. Prime industrial yields in the Midlands are at 6.0% to 6.5% for secure income. At the subject property, the return will fall to 4.6% if a break clause is exercised under one of the leases later in the year and the asset will further suffer, if either of the two remaining tenant businesses falter.
Prudence suggests investors should not abandon principles of good investment to such a degree. There are alternative avenues to securing property assets which will be stronger in the medium to long term. Drake Howard Property is able to explore these avenues with its retained clientele.