Investment: Shopping around

Fears of a slump in house prices has made retail investment much more attractive
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The Independent Online

Property investors are turning to auctions to find commercial premises to add to their residential property holdings. Interest in commercial property, such as shops, factories and offices, has been rising in response to fears of a slump in house prices. But estate agents and auctioneers tend to separate the two areas, so it is sometimes difficult to move from one to the other.

Property investors are turning to auctions to find commercial premises to add to their residential property holdings. Interest in commercial property, such as shops, factories and offices, has been rising in response to fears of a slump in house prices. But estate agents and auctioneers tend to separate the two areas, so it is sometimes difficult to move from one to the other.

At the entry level of the commercial property market, private investors have big advantages over the big property institutions, says James Cannon, the head of Savills' new commercial property auctions team.

"As the institutions have got bigger, the optimal size of property they hold has got larger," he says. "The management effort involved in increasing the value of smaller properties makes them relatively unattractive." As a result, they are selling off their smaller units and have deserted the auction rooms, except when buying specialist properties or assembling sites for big projects. "Eighty per cent plus of the lots at commercial auctions are sold by institutions to private investors - we call ourselves a property-transfer business," Cannon says. "Over the last few years, property companies have got larger and tend to go for larger lots, disposing of the smaller ones."

Private investors can give smaller lots the attention they need to fulfil their potential. And many investors who have built up substantial portfolios of houses and apartments are now looking at the relatively hassle-free life of the shop or factory owner.

"People start by buying houses because we all understand them - everyone has a house - but when they get tired of repairing the drains and look at a nice shop with Boots as the tenant and four cheques a year with no effort, they go for it, especially if there are upper parts that can be converted into flats," Cannon says.

Savills' first commercial auction, scheduled for 16 May, features a number of classic "shops with upper parts", including a Blockbuster video shop in Gorleston-on-Sea, Norfolk, being sold by bookmakers Ladbrokes, who used to operate there.

Blockbuster pays £13,750 a year for the shop, and the flat above is vacant. Savills expects it to sell for more than £200,000.

Cannon expects much interest in a pretty Victorian shop and offices in the comfy London suburb of Pinner. "It will appeal a lot to the tweed-jacketed investor," he says. "The building is very nice, it is occupied by an estate agent and overlooks a public garden."

It is also being sold by the Duchy of Cornwall, a fact that ought not to count with hard-headed investors, but undoubtedly does, Cannon claims. The rent is £30,500 a year and the guide price is £475,000.

Another form of property that most of us feel we understand is the pub, and Savills has The Church in Bolton under the hammer. The attractive 19th-century building is held on a 4,900 year lease at a fixed rent of £25 5s 9d. This was a substantial sum when the lease was set up in 1808 but is now dwarfed by the £21,975-a-year paid by mine host today. The guide price is £250,000.

"A select few move into offices because they have a finite life before they have to be renewed and the lift has got to work, and all the electrics and technology sorted out," Cannon says.

For someone willing to take the risk of an office investment, a long lease of a suite on the ground floor of an office in Docklands is also in the sale. It is on a long lease and has four parking spaces, with a guide price of £275,000.

A curious lot is the side of a wall on the Old Kent Road, with the right to fix advertising hoardings on it. Visible to thousands of commuters every day, many of whom will spend many minutes sitting stationary next to it, the wall could be a nice little earner with an electronic poster machine. The estimate is £15,000.

Commercial property has many advantages for investors, but there are drawbacks as well, says Gary Murphy of Allsop & Co.

"The entry costs are quite high compared to the residential sector, where prices are low in comparison and you can borrow most of the money," he points out. "It is more of a long-term thing."

And although running commercial property may look like a simple matter of collecting the rent every quarter, it is still necessary to do your homework. "You need to be a specialist to understand whether you are overpaying or getting a bargain," he says.

High street shops are a case in point. "If you are buying a shop in a provincial town, you may be unaware that Tesco has applied for planning permission for an edge-of-town development that could kill your tenant's business," he says. "If you cannot afford to risk large sums, it is probably better to buy shares in quoted property companies."

Savills' commercial property auction is on 16 May at Claridge's. For more details, visit www.savills.co.uk.

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