Commercial Auction Annual Review 2015
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Market notes

For years buy-to-let has been a staple investment choice for those looking to generate healthy income on their savings.

However, George Osborne’s double whammy of tax changes on ‘buy-to-let’ in 2015 have reduced the viability of the sector for many. Mortgage interest will no longer be deductible from tax from 2017. Investments for higher-rate taxpayers with mortgage interest above 75% of their rent will become loss-making.

With the Chancellor also adding a 3% increase on stamp duty for all second properties from April, buy-to-let is no longer the attractive investment it once was.

For example a £500,000 purchase price of a ‘buy-to-let’ property will attract £30,000 stamp duty whereas on a commercial investment stamp duty will only be levied at £8,750.

While the capital gain of residential property is still a key attraction, commercial property has the potential to generate far more attractive returns while requiring less day-to-day management.

On the commercial front, there are many assets available at auction that offers stability of income. The results show that even un-fashionable areas can contain properties that provide a good quality rental income. The well placed unit in a less attractive area can support a thriving business, which in turn supports the payment of rent.

Convenience stores for example have offered stable investment income at auction over the past few years, with yields steady at around 6%, which has not changed in 5 years. Betting shops or banks may make cost savings by moving online, but a convenience store’s main selling point of being convenient will ensure a need for a physical presence. People will always be caught short for coffee or milk, so demand is typically stable so long as the location is right to begin with.

Location is also key to finding the opportunities outside the ‘safe havens’ of London and the South East.

At a headline level, one of the more stable regions has been the South West. With nearly a third of the region’s population living in the countryside, local businesses are able to tap into a pool of affluent local customers. While other types of retail are more susceptible to the threat of online shopping, the older generation’s preference to go to a shop – and the fact that banking and shopping for many people still requires a physical foothold – has ensured stability in this area. Additionally poor transport links in rural areas in Devon and Cornwall make local pubs, restaurants and post offices more likely to serve as a focal point for a local community, thereby ensuring continuing custom.

For those still considering residential, there is plenty of value in converting commercial space. The government’s extension of Permitted Development Rights (PDR) to allow conversions without the need for full planning permission has seen big demand for offices at auction in recent years. Shrewd investors will be keeping an eye out for light industrial and launderette lots, which now also come under the PDR.

However the lesson of the last year is that for those willing to leave the emotion of home ownership at the door, buying a commercial property for investment at auction could prove a lucrative option.