Adding value to commercial properties

[newlocs]

Hi everyone,
I am interested in commercial properties and was wondering if anyone would be kind enough to answer the following questions.
-What would be the ideal buy for a commercial property other than high yields?
-What is the minimum lease one should go for?
-How can one add value to a property or/unlock gains from a property?
-Is there a formulae to calculate the value of a property
-Is there a formulae to calculate the rent?
-What type of tenants are best from a lenders point of view?

So much to learn.

I'd be very grateful for any answers.
newlocs

[Editor]

A lot of the answers to your questions and a lot more are available in some good investment books available on this site - see:
http://www.landlordzone.co.uk/property_investment.htm and
http://www.landlordzone.co.uk/commercial/comprop.htm

As you say yourself, there's a lot to learn - doing your homework is the key to succesful investing.

However, I'll give you my opinions:


-What would be the ideal buy for a commercial property other than high yields?
I can only state the obvious here because there are so many types of good commercial property investments: good location, good tenant demand, good tenant on a long lease. Yields range from not much more than you can get in a building society up to quite high yields (10 - 25%) for more risky investments. The trick is to take only calculated risks based on research and knowledge so that for you the risks are minimised.


-What is the minimum lease one should go for?
This all depends upon tenant demand - you go for what you can get. The long 25 year institutional leases are disappering even for prime, so 15 years would probably now be consider a good long-term lease. For smaller secondary shops, say, 9 years would be good. If you get 5 you are doing OK. Anything less is messy.


-How can one add value to a property or/unlock gains from a property?
This is one way you can add value: buying property with underutilised space, I have found, is an excellent way to increase yields. You make the most of the property by adding units, or even residential space (eg flats above shops with good tax breaks) This of course takes you out of investment and into development, entailing a whole new range of skills, but it's well worth it!
Secondly, buying in an improving rather than a declining area should add value over time.
Unlocking gains I suppose could be a matter of re-financing if and when you achieve capital appreciation, and of course commercial property let to un-incorporated businesses has some real CGT advantages for the landlord on disposal.


-Is there a formulae to calculate the value of a property
The value of anything is always based on a multiple of its earnings, or potential earnings. This also relates to risk. Therefore a prime high street shop with comparable yields of say 5%, for ease of calculation, let on 50k would value it on a multiple of 20 - (100/5=20) = £1m
Whereas a seconday shop let with comaparable (other shops in the area) yields of say 10%, let on 10k would value it on a multiple of 10 = £100k. But value is an abstract thing and is many facited: Value in use (value to the business using it) market value (comparables), sale value (what you can actually get for it) and value to you (as an investor). You need to carefully calculate the value to you, and don't pay more!


-Is there a formulae to calculate the rent?

Pretty much the reverse of the above, with comparables being the key. This is where the professionals, agents and surveyors come in to help you - see my previous post answer.


-What type of tenants are best from a lenders point of view?


Ones that sign long leases and always pay their rent!!! It's very hard to say what will turn out to be a good tenant. Established blue chip businesses are obviously best. With new businesses it's a lot more of a gamble. Certain businesses do better than others though. Certainly with shops, the big supermarkets and chains have made life very tough. Certain service businesses do very well. Ask you accountant, because they see the figures from small businesses.

As a general comment: some now feel, including myself, that money flowing into property of late and demand generally has pushed yields too low. There are also some ominous signs in the world economy generally that we could be heading for higher interest rates, higher inflation and a general slow-down. This could have a big impact on trade, on property values and if you are too highly geared, on your own pocket!

Secondly, if you are buying tenanted property make sure you do full due diligence checks on the tenant-business before you buy. See:
http://www.tenantverify.co.uk
A property with a substantial business on a 20-year lease sounds a fine investment, but when the business goes bust 18 months after you purchase (as happened this week to lots of private investors in shops rented to a large retailing chain which sold all it's shops on a "sale & leaseback" 18 months ago) your investment is going to look pretty sick!

[newlocs]

Thankyou for such an informative post Editor.
Quite a selection of books to choose from. Would you please advice in particular which books focus on the development side?
Regards
newlocs