Anyone can invest in commercial property: all you need is the cash or enough cash to get a mortgage. Anyone can invest isn’t the same as becoming an investor. To become an investor, one needs to think like an investor.
Investment is about becoming better off than you are now. For a property investment to go up in value, the price you pay when you buy it must allow for that possibility. To assume that it does is a mistake. It is easy to overpay, especially if you are the sort of investor that thinks that buying an investment property automatically makes an investor.
Commercial property has two values: a value if the property were vacant and a value if the property were let. Unlike residential property which is generally more valuable when vacant than if let, commercial property is generally more valuable when let than if vacant. The difference in value between vacant possession and let on an existing lease is the premium that buyers in the market for the particular type of property are willing to pay.
Whether that premium and how much of it is worth it depends upon the bottom-line. Successful investors protect the bottom-line: what’s the worst that could happen? For investors generally, most of whom are not successful beyond if luck would have it then just about keeping up with inflation, the worst doesn’t bear thinking about so they don’t. Instead, they imagine that they would be able to manage regardless, hoping that when everyone’s in the same boat help will arrive for everyone. In the meantime, with the market generally behaving itself, they assume that if the property were vacant then it could be let or sold or developed for reletting or sale, and if the property were let already then the tenant would pay more at rent review or on expiry of the lease or if that tenant goes broke or quits at the end of the lease then another tenant would be found and at least pay the same, possibly more. The fact that those assumptions normally incur non-recoverable costs that when added to the purchase price reduce the yield is just one of those things that is a part and parcel of ownership; and the kudos of being an investor.
In the market for commercial property investment, the seller is likely to know more about the property and its potential than the buyer. Whether advised or not, the seller is likely to have considered all the options and concluded that even if the possibilities were to materialise, it would save a lot of effort, time, hassle, to sell and take advantage of high prices whilst they last, rather than risk exploring the possibilities and in the process missing out on peak pricing. When investment conditions are favourable and the premium in the market such that almost if not all of the potential for growth can be sold in advance, it doesn’t make commercial sense to hang on in the hope of doing so much better.
To attract a high price, the proposition needs to be packaged attractively. The marketing of commercial property investments has become much more shrewd in recent years. For single lots, as distinct from portfolios, The target market is the tsunami of inexperienced investors. With glossy brochures high quality photos, floor plans, loads of information handing inexperienced buyers answers on a plate such that the proposition becomes convincing, marketeers for sellers know that they are more likely to get away with hiding the reality.
With vacant property, the reality for inexperience is generally not as disappointing as the let-down that can come from buying a property with a tenant in place. Standing between the potential in the minds of the investor is a tenant that doesn’t care a jot about the new landlord and the existence of a lease whose terms and conditions are unlikely to favour the investor’s objectives. The landlord and tenant relationship being what it is conceals the tenant’s indifference: the lease, however, does not.
I find it fascinating that many apparently otherwise intelligent people that buy into the commercial property investment market don’t seem to have much idea what they are letting themselves in for. It is all very well thinking it’s property so it must be a safe bet, but what they don’t seem to understand is that the property system isn’t interested in providing buyers with a better return on the investment than the premium price that the seller achieved for the sale. They think that the potential in their choice of investment was something only they themselves spotted, when more likely it was a set-up, engineered by the seller to obtain peak price.
The commercial property market is unregulated. Auction catalogues can lead to misconstruing without any come-back: caveat emptor. In money matters, no one likes to admit they’ve been made a fool of. To buy the potential in advance without any certainty of achieving it is a feature of the unsuccessful investor. When the premium paid for the investment proposition is the sum of the parts, a great deal hangs on everything falling into place.
It is challenging to think like an investor in the prevailing market. Once upon a time, a lower yield was commensurate with capital growth: not nowadays. Investor sentiment is for yield and willing to pay a hefty premium. Opportunities for rental and capital appreciation, known as investment performance, are few and far between.
The Rent Review Specialist