A growing army of individual investors have been snapping up commercial premises on Britain’s high streets, including bank branches used by Barclays and HSBC, restaurant chains such as Pizza Express, and retail outlets such as Spar and Threshers.
A new Ebay-style online exchange, Propex, is even offering phone-mast sites — which are let back to mobile-phone firms — to investors seeking a novel way of making money from the property market.
Auction houses predicted last week that this will be a record year for commercial property as investors seek an alternative to the oversaturated residential market. Last year, they sold premises worth about £2 billion and Jones Lang LaSalle, one of the leading business-property auctioneers, said this year was shaping up to be even better.
The craze has been fuelled by eye-catching yields on commercial property, which can be as high as 10%, compared with only 3.6% on residential property after costs, according to IPD, a research firm.
Landlords can also let to blue-chip tenants on leases of up to 20 years, compared with a typical term of six months for residential tenants.
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Investors get generous tax breaks on business property. Unlike residential property, it can be held in self-invested personal pensions (Sipps), which means the government gives you tax relief on the purchase price. And there may also be a lower rate of capital-gains tax than on traditional buy-to-lets.
Richard Auterac of Jones Lang LaSalle said: “Demand for commercial premises has reached unprecedented levels among individuals as they seek secure long-term tenants, rather than troublesome students who stick around for only a year.”
Don’t get carried away, though. A flood of buy-to-let investors pushed house prices to record levels a few years ago and deflated yields, and the same thing could happen in the commercial market.
Elliot Sorsky, 37, from Finchley, north London, is one investor who has switched from traditional buy-to-let to commercial property. His portfolio includes 10 mobile-phone masts, which he bought primarily for their high yields — the rental income as a proportion of price.
His most recent purchase, in Flintshire, North Wales, cost £74,500. The site was already let to Orange, the mobile-phone firm, and is guaranteed to pay an income of £5,500 a year — a yield of 7.25% after costs.
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He said: “It gives me a great income stream because the rent is guaranteed until 2014.”
It is not only mobile-phone masts that offer juicy yields. Pubs, shops and offices can all be purchased at auction and often pay high returns.
The properties generally cost less than £1m and you can borrow money towards the price, as with buy-to-lets, so they are within the reach of individuals.
At a recent Allsops auction, an office block on London’s Albert Embankment, let to Riverbank Hotel Operator, was sold for £730,000. The rent of £65,925 was guaranteed for a term of 20 years, giving a yield of 9%.
At the same auction, a pub in Bradford, let to London & Edinburgh Inns, was snapped up for £397,000. The rent of £35,000 was guaranteed until 2030, giving a yield of 8.9%.
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The auction boom is also moving on to the internet. Last week, Propex (propex.co.uk) launched the first service to enable you to buy and sell properties online from home. Two dental surgeries — one in Oban, Scotland, and the other in Devon’s Dartmoor National Park — are up for sale with guide prices of £580,000 and £365,000 both with yields of 6.8%.
Investors should bear in mind, however, that while rents are often advertised as “guaranteed”, leases may have break clauses that allows tenants to get out of the deal at regular intervals, say every five years. And there is, of course, no guarantee you will get your rent if the tenant goes bust.
Commercial-property investors have enjoyed strong capital growth as well as healthy yields in recent years, but analysts say it is unlikely to last.
In the 12 months to the end of July, the total return from commercial property was 22%, according to IPD, making it a better investment than buy-to-let, shares or bonds.
However, the strong price rises mean that some properties have started to look expensive. Yields on high-street shops, for example, have dropped as low as 5% as prices have surged.
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Growth in the market as a whole is expected to cool over the next few years: analysts predict that total returns will ease to 7% in 2007.
Few commentators are predicting a crash, though, and they point out that the capital growth of the past five years has been exceptional. A return of 7% is in line with the long-term average.
As long as investors are aware of the risks and pick the properties with the most secure yields, advisers say there is still a strong case for investing in commercial property. Justin Modray at Bestinvest, a financial adviser, said: “Investors have been spoilt for the past five years, but 7% is still a reasonable return.”
Commercial property is also relatively uncorrelated with other assets — the market does not tend to go up or down at the same time as equities and bonds — so it can protect your portfolio from sharp declines.
Advisers recommend that between 5% and 15% of a balanced portfolio should be held in property.