What lies beneath

The Government is pressing shop owners to convert unused space into flats. But do the returns justify the outlay? Chris Partridge looks at what's around

On the face of it, shops with flats above are interesting investments. The shop is let on a long commercial tenancy, providing a consistent income. The flats above can be let out to put the jam on the bread. "Living over the shop" used to be standard practice, but shopkeepers like gardens just like the rest of us and flats over shops are now under-used. High street chains regard the flats over their shops as free offices or storage space, not worth the trouble and expense of doing up for letting.

On the face of it, shops with flats above are interesting investments. The shop is let on a long commercial tenancy, providing a consistent income. The flats above can be let out to put the jam on the bread. "Living over the shop" used to be standard practice, but shopkeepers like gardens just like the rest of us and flats over shops are now under-used. High street chains regard the flats over their shops as free offices or storage space, not worth the trouble and expense of doing up for letting.

As a result, the Government has been campaigning for flats over shops to be returned to residential use as a way of easing the housing shortage. So far, however, shops with flats are mainly the preserve of professional developers and small builders, who let out the shop unit and sell off the flats on long leases.

Commercial estate agents report that shops "with residential upper parts" (as they like to call them) rarely come on to the open market because they are either bought by the tenants of the shop or snapped up by developers. "They are not easy to get," says David Foskett of Copping Joyce. "If surveyors get something small and juicy, they give it to a favoured client in the hope the favour will be returned later. Joe Public doesn't get a look in."

There is, however, one place where Joe Public can compete with developers on equal terms: the auction room. In fact, many companies and local authorities prefer to dispose of properties by auction precisely because they cannot be accused of quietly selling them to friends.

Three weeks ago, FPDSavills and Andrews & Robertson put a selection of shops with flats under the hammer. FPDSavills sold one in Lewisham Road, London SE13, with a maisonette above. The bidding stopped at £142,000. As the shop pays £14,400 a year in rent, that represents a 10 per cent return before the flat has been done up for letting. A large shop in Highbury with a flat on the first floor and a maisonette above that fetched £470,000. The property is definitely a doer-upper, as the video shop and ladies' toning studio are due to vacate and the building needs to be completely modernised.

Andrews & Robertson sold a futon shop in Forest Hill, south London, with a flat above, for £275,000. The rent on the shop is £6,500 a year, but this is set to increase to £13,500. The rent on the flat is £6,000 a year, but it could be converted into two one-bedroom flats and the basement might become a studio flat with a patio at the back.

But there are obstacles to amateur investors, warns auctioneer Paul Mooney of FPDSavills. "To get a commercial mortgage you will need a hell of a lot more deposit - at least 20 to 25 per cent. And there is a lot more homework to do." For it to be a success, you have to understand the retail trade as well as residential lets. Distinguishing between good and bad locations for shops is not easy; note the number of premises that see a new tenant every few years. The legal requirements for commercial tenants are different, too. In addition, certain types of shop make the flats difficult to let - any business that starts early and closes late, for example, or creates noise and smells.

The Savills auction featured a pair of shops with a flat extending over both, in Stanwell, Middlesex, which fetched £266,000. The rental income on the shops totals £18,800. One of the shops is a chip shop, however, with the risk that the smell of fat frying will severely limit the rent that can be charged for the flat upstairs.

Andrews & Robertson sold a take-away curry shop with three vacant flats above in Tulse Hill, south London, for £425,000. The rent on the curry shop is just £10,800 a year, which means the owner of the flats will have to rent them very well to get a decent yield.