Another month, another amendment to the permitted development rights in England, which further heralds in the Government’s vision that private business will be the saviour of town centres. This time (amongst various others announced at the same time), Robert Jenrick has paved the way for easier conversion to residential from commercial premises falling within Class E. This new Class MA comes with various caveats including a maximum size limit of 1,500sqm, the building having been vacant for at least three months and various prior approval matters. Clearly this will be a powerful new strategy for investors and developers to pursue when it comes into force and will undoubtably aid in the revitalisation of some town centres – although clearly not all, as the conversions won’t stack financially in many towns and cities across the country. And, of course, this is only in England - the other nations must still apply for planning approval in the usual way.
With all the recent changes to permitted development rights in England it would be easy to think that the only strategy involving commercial property would be to convert it to residential.
But as an investor it is essential to have multiple exits up your sleeve. And there are clearly many other strategies that you can employ with your commercial investing than residential conversions – some of which can be more profitable (and sometimes much less hassle). There is a reason why commercial property has historically been one of the most popular asset classes in which to invest in the UK, and that is because of the ability to add value and secure longer-term income – quite often without even putting a spade in the ground. Despite the recent economic travails, these strategies are still very much achievable in most sectors (even retail) and you are most definitely being a ‘one trick pony’ with your investing if you are just looking at commercial premises with a view to only converting them to residential.
In this article, I'm going to take you through a ‘5 Step Blueprint’ for adding value to all types of commercial property. These include:
- Commercial to commercial
- Regear and lease negotiation
- Additional income
- Commercial to residential
- Building reconfiguration / Extensions / Development
1.Commercial to Commercial
Unlike residential, commercial property increases in value once it is let to a business occupying under a lease. You will have secured longer term income on the property, and, as a result, valuers will view this as much less risky than a vacant property and may improve the yield. Letting a vacant property therefore has the ability to provide an immediate value uplift. The beauty of this strategy is that you don’t necessarily need to do any physical works to the property to entice a tenant to occupy (although you may have to), unlike with residential property.
With this type of asset management, you're always looking for the highest value use on the property - mainly because you want to achieve the biggest valuation uplift - and the new Class E use has aided this in England. Generally, the best way to achieve this uplift is to buy the right property in the right location. There is a reason why the phrase ‘location, location, location’ was first coined by the commercial property industry. It's all about risk and certainty – if you buy in the right location there should be more tenant demand and therefore more competition for the unit, which will ultimately facilitate you finding the best tenant and achieving the very best rent and lease terms you can.
There are several ways to find tenants, the most common of which is through commercial property agents, but you can also make contact with tenants direct. Some tenants have in-house acquisition and management teams, so to contact them direct and verify their requirements is relatively straightforward. However, the number one (and usually least risky) way to find a tenant for your commercial property is to turn the whole process on his head. Instead of finding a property and then looking for a tenant to fill it, a better way is to find a tenant first, do your due diligence on them, ascertain their accommodation requirements, and then find the right property to suit. This is a strategy that not many investors pursue but ultimately can significantly reduce risk and lead to more immediate value gains.