Exit Strategy

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An alternative investment, property is an alternative to cash and other liquid forms of investment. Arguably, commercial property is more of an alternative than residential because commercial is more tenant-oriented. Normally, selling a residential property with vacant possession fetches more than if let: whereas with commercial property it is normally the other way round.

Cash buyer or borrower, a time will come when you will want to take your profits. Either from selling or (re-)mortgaging the equity or disposing of your interest in a tax advantageous way. Even if that time were not in your own life-time, it will in any event arrive when the direction your investment is taking differs from where the market for the type of property is going.

Investors can buy and sell and tenants come and go to their heart’s content but activity counts for little without rental growth. Rental growth in the market for the type of property is fuelled by tenant demand. What tenants want, the suitability of the building, the location, its age and construction, are amongst the deciding factors. What looks good to an investor might not look so good to a tenant. Market heading in another direction is inevitable. The market is dynamic: day-after day, year after year, from subtle variations to discernible shifts to radical structural changes. It can be challenging to remain in sync, let alone keep up. As for anticipating, judicious choice of proposition to begin with is only the start. Unless you monitor your investment’s performance regularly and have some realistic measure for comparison, chances are that you could miss out.

Inflation is a popular measure: property has a reputation as a long-term hedge against inflation. Inflation and market rent are not linked. Expecting a rent on review to market rent to at least keep up with inflation could be wishful-thinking. It is not only rental income that in real terms can change with the passage of time, capital value can vary also, often substantially depending on purchase price and date of purchase. Assuming market value at date of purchase, whether that value is sustainable depends upon investment market sentiment unchanging (or evening out) between purchase and resale dates. Investor sentiment is also subject to demand, the appeal of the proposition to other investors.

For many private landlords, investment is a passive pursuit. To an experienced professional adviser, the ‘armchair’ investor has some amateurish characteristics: indecisive, dislike of costs, slow to respond but jumping to conclusions. Tenant identity highly prized, the better the covenant the less the hassle, is worth paying a premium price for. But even amongst full-time investors, the one thing that is likely to escape notice is quite possibly the most important. Usually, the tenant’s intention for occupation duration of the property is not communicated in advance. For a landlord, it can come as a shock to be told that the tenant’s request for something or disinterest in renewing occupancy or on the same terms as before could affect the value of the investment.

The ability of tenants to determine the direction of the market should never be underestimated. For the landlord, the property advantages and disadvantages can be assessed, but when the investment purchase price is linked to tenant covenant, what the tenant (including the privity tenant) is considering and planning is more important. For a forward-thinking landlord, keeping tabs on the investment includes a watchful eye on the market sector in which the tenant operates. A classic example is the banks. Over the years, hundreds of buildings let to banks have been sold, often on sale-and-leaseback, to inexperienced buyers who have discovered that not only has there been little or no scope of increase at rent review but also bank branch closures may not just affect the landlords themselves, there might be dire consequences for the shopping locality too.

The inherent risk of illiquidity of property might be lessened by an active market, relaxed bank lending criteria and expeditious conveyancing, but illiquidity exists for a reason: to prevent buyers from allowing enthusiasm to cloud judgement. Judgement involves deciding on the balance of probabilities. When the purchase price is geared to the investment value of the tenant’s covenant, and whether or not the choice of investment pays sufficient heed to property fundamentals, in particular the terms and conditions of an existing lease, a critical factor to be included in investor appraisal is the direction of the market in which the tenant operates.

A strategy is not a plan. A strategy is a series of steps for achieving a plan. When the plan is to sell the investment at some time, steps must be taken beforehand to enhance the marketability. The proposition must be got ready for selling. A combination of keen demand and high prices especially at auction bring out the better properties but many sellers particularly at auction are not selling for the sake of it, but to cash in on investor gullibility.

The best time to sell a commercial property investment is before the change in direction becomes obvious. Wanting tangible evidence before taking action is one of the best ways to come unstuck. By the time evidence emerges, it is often too late. Much commercial property investment on the market nowadays is so overworked and over-priced by sentiment that virtually all of the potential for long-term investment performance has been eradicated. Even if you disagree and reckon there is good value for money still to be found, when buying in the prevailing market for long-term investment it has surely become even more important to ensure that the tenant is keeping up with the direction in which the tenant’s business market is heading, otherwise the landlord is at risk of over-paying and non-recoverable costs.

… LandlordZONE.

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10 year fixed BTL rate at 2.99% from Barclays

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Barclays is launching a range of Buy to Let fixed rates with the headline grabber product being a 10 year fixed at 2.99% with a £2000 fee up to a maximum of 65% Loan to Value (LTV). Other rates to be offered include: 2.09% 2 year fixed max 75% LTV with a 1% fee or… Read more

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Christmas Prize Draw Winner 2016

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The LandlordZONE® Christmas prize draw competition sponsored by the following suppliers to landlords has been concluded and a winner drawn at random.

Elfin Kitchens

Tax Insider

Emerging Property

National Landlord Investment Show

Landlord Manager for Sage

Property Investor & Homebuyer Show

Accommodation for Students

Decorus for Sage

Landlord David Steel is this year’s winner of a £250 Amazon voucher.

Midland’s based David has been a residential private landlord in England for something like 20 years.

Like many landlords of his generation (he is retired now) he got into the landlording business by accident. David initially bought a second house when a relative needed some emergency accommodation after a marriage break-up. However, the relative had a change of mind and David started out on his road to letting to private tenants.

Later he move south with work and purchased another house in the Home Counties, which eventually became another letting when he moved back home.

From there David had realised the benefits that landlords enjoy and has since added 6 more properties.

So now with 8 residential properties and mortgage free, David and his wife find the income is funding their retirement nicely, and what’s more he has few worries about the recent tax changes.

David is like many thousands of landlords in the UK who have funded accommodation for others and are providing a valuable community service and we applaud him for that. He is an accredited under the Dudley and Sandwell scheme operating his business in a responsible way.

… LandlordZONE.

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Sliding scale of rents depending on tenant risk?

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I have a couple of properties becoming available for family lets, but in the past I have found them to be hard to let at the rent level I’ve asked for. Due to taking on fairly high risk tenants (DSS tenants usually with no deposit), and tenants leaving properties damaged and with rent arrears, I… Read more

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Benefit payments direct to landlords in Scotland

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Universal Credit: Universal Credit (UC), introduced by the UK Government in 2013, is to replace six other benefits and tax credits such as Jobseeker’s Allowance, Housing Benefit, Working Tax Credit, Child Tax Credit, Employment and Support Allowance and Income Support. It is currently being rolled-out in stages across the United Kingdom. The Housing Benefit element […]

… LandlordZONE.

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