Our strategy has always been to dip in and out of different markets depending on where we can see value and potential, or as we like to put it ‘where there’s an angle for us’, this can be full-on redevelopment, splitting into smaller units or just a complete change of use.
In the early part of 2016 we were very active in conventional house refurbs, most of which we added significant value then sold them on, but a few we added to the portfolio and we will hold them long-term. The shine started to wear off a little with the introduction of the 3% stamp duty, if we carried on at the same rate we bought at in 2016 we would be paying an extra £100k in stamp duty, psychologically that upsets us. We only buy property in need of refurbishment, invariably un-mortgagable & we are bringing these back into occupation yet we get penalised for doing it, anyway rant over ..let’s look at 2017.
Due to the increase in Stamp duty & impending Section 24 (more on that later) 2017 will no doubt see more investors move towards commercial property, particularly shops/offices and any remaining pubs that haven’t been sold already, we have been seeing over the past few months a lot more competition in this area. We already have a couple of commercial deals lined up and the great thing is that if you find the right property / tenant combination then being a Commercial Landlord can have many advantages, yields are usually significantly higher than residential and tenants usually take on lots of the landlords responsibilities, such as elements of maintenance, cost of insurance, plus tenancies are so much longer, we have many tenants that have taken 21yr leases. There are a couple of differences with commercial over residential however
1/ Finance –
Commercial lenders caught a cold in the last recession, particularly with commercial property, so getting started can be hard. Having done many commercial and mixed use schemes over the past 15yrs we are lucky not to struggle getting funding when we need it but that won’t stop us being careful with what we buy and making sure anything we do buy will have good returns and 3 or 4 options for what we do with it.
2/ Voids can be a real problem –
they tend to be much longer and particularly with retail and leisure location is absolutely vital, there are failing high streets everywhere, in some you can’t give shops away. In locations like these we have been lucky in coming up with other uses, ranging from demolition and renting a flat site for car sales or hand car washes to converting to residential or mixed use with a ground floor shop and residential flats above. Also, the landlord is liable for business rates on empty units after 3 months, which can be a large expense.
3/ Covenant –
We will continue to finding tenants that have a good covenant strength, In the past we have been lucky and attracted some PLC and International Co’s as tenants, getting those is much harder now as they get offered absolutely everything and have probably looked at the site before we did. It is staggering how the quality of tenant can affect the value, about 5yrs ago we redeveloped a pub site into a convenience store and Chinese takeaway with 3 flats above. The convenience store last year was bought out by a national chain and overnight the value of the investment by £100k
4/ Added Value –
We have never bought a straight-forward commercial investment, rents have barely moved on commercial units in the past 10yrs, If anything there is a downward trend, Large double fronted shops are always good, as are pubs, we can split the GF into 2 or 3 units, hopefully gaining hot food/takeaway consent and upstairs split the accommodation into 2,3 or 4 flats.
We are only a couple of months away from Section 24 being implemented with many landlords falling into a new tough, grossly unfair tax regime, lots of these will turn into loss making investments so we are sure this is why we are seeing huge interest piling into commercial property, they see commercial as balancing their portfolio and somewhat escaping the implications of Section 24. Sadly, though i don’t think this government and particularly the chancellor have finished with us,
There’s a cash cow here they haven’t finished milking and we see their next target as being HMO’s – there are lots of options here to raise revenue and wrap up with more red tape.
Local Authorities will no doubt look to PRS landlords as a nice little earner, especially HMO’s. We have bought a few failed HMO’s during 2016/17 to re-convert back to houses or flats, I expect this to turn into more of a stampede this year because there’s only a tiny section of our target area where there’s sufficient demand, we know of many locally that have 30-60% occupancy.
Having a great team in the West Midlands we have been able to free up some time and look further afield, fortunately we met a superb managing agent in the North West, Paul Ainsworth-Lord and his team at Ainsworth Lord Estates have been great to work with. 3yrs ago we bought a Ltd Co in Blackburn that owned a small portfolio of 3 properties, this has grown into a £2M portfolio of residential and commercial property.
We will widen the area we cover this year and are sure we can grow this company by around 35% subject to finding the deals that meet our return requirements. Alongside growing this, we will actively flip more properties, some as individual deals but also some within small Ltd Co portfolios of 3-8 properties yielding around 8-8.5% , we are confident there will be a market for ‘portfolios to go’ that we can sell the company to investors who are looking in the £250k-£750k range.
Dividing time between the 2 locations has worked superbly, but it’s so comforting having a great team up there that can manage any problems that arise, this is vital when you are 130 miles away. We have also identified another area and potentially have a suitable agent to work with. If they can be as good as Ainsworth Lord Estates have been It will be a great start.
2017 is certainly going to be eventful, it will also be more important than ever to constantly review your strategy, portfolio and every aspect of our business and try to be ready for any surprises that happen.
We both wish all our investor friends a happy and successful year, work hard, do due diligence on everything in sight, and we will reach our aims.
Phil and Mark Stewardson