Alternative assets attracting attention
What links an animal hospital in Rotherham, South Yorkshire, an undertakers in Stanmore in Harrow, and a gym in Tottenham, N17?
The answer is that they are all unusual or alternative assets to be bought by investors at auction over the past few months, as buyers search for commercial assets to replace or supplement the high street shops that traditionally form the backbone of many portfolios.
Nilesh Patel, a director at Prideview, which specialises in advising private investors about auctions purchases, says the firm increasingly seeing medical or fitness concepts appealing to investors as buyers shy away from traditional retail for fear of falling rents and failing businesses.
What links an animal hospital in Rotherham, South Yorkshire, an undertakers in Stanmore in Harrow, and a gym in Tottenham, N17?
The answer is that they are all unusual or alternative assets to be bought by investors at auction over the past few months, as buyers search for commercial assets to replace or supplement the high street shops that traditionally form the backbone of many portfolios.
Nilesh Patel, a director at Prideview, which specialises in advising private investors about auctions purchases, says the firm increasingly seeing medical or fitness concepts appealing to investors as buyers shy away from traditional retail for fear of falling rents and failing businesses.
“Over the past couple of years we are seeing a number of new sectors become increasingly popular with investors,” he says.
One recent purchase was a 24/7 animal hospital in Rotherham, let to Medivet for a remaining term of seven years. The property was in a predominantly industrial area and was on a huge plot, lending itself to future development potential. It sold for £612,000, reflecting a 6.7% yield.
Similarly, another Prideview client, this time a first-time investor based overseas, purchased a lock-up unit in Seven Sisters, N15, let to niche US fitness operator 9Round Fitness on a nine-year lease, for £250,000 – a 6.5% yield.
Another recent purchase was a Co-op Funeralcare unit with four years remaining on the lease in Stanmore, Harrow, which was purchased for £550,000, reflecting a 6% yield.
“Although it was a new business, the investor was attracted to the ‘medical’ nature of it, and of course the fact that Co-op is also one of the best operators nationally,” Patel says.
Private investor Kishor Ruparelia is one of the many buyers in the market bidding on alternative assets. Ruparelia bought a 2,880 sq ft Halfords Autocentre in Ellesmere Port, Merseyside, in Allsop’s July auction for £522,500, bringing in an income of £41,086 and reflecting a yield of 7.86%. The property also includes an MOT station.
“These sorts of investments usually change hands at around 6%. There was a lease running until 2031 and a rent review coming up in the autumn, so I should get a good income from it and there is potential to develop there, too. Even if my tenant vacates, the MOT station seems to do good business so I should be able to get another tenant.
“In a recession people still need to get their cars tested and repaired. Of course there are risks with every investment, but I think this is OK.”
Money in medical
Ruparelia also sees the medical sector as a healthy place to invest his money. He acquired a dentist’s surgery which was being sold by receivers, and he has since secured BUPA as a tenant in the building.
Certainly, according to Allsop’s most recent figures, the proportion of properties classed as alternative investments – a nebulous collection of assets which includes car parks, funeral homes, GP surgeries, vet practices, nursing homes, petrol stations, law firm offices, private schools, golf courses and other miscellaneous sectors – has been growing steadily.
Allsop calculates that the proportion of alternative assets it has sold through its auctions business has grown from £27m in the first half of 2018 (8% of the total sold) to £31m in the first half of 2019 (11% of the total sold).
Allsop’s July sale saw strong bidding for a handful of former KwikFit garages. A 9,099 sq ft unit in Dereham, Norfolk, with an income of £65,400 eventually sold for £780,000, reflecting a yield of 8.4%. Another 4,881 sq ft garage in Blackburn, Lancashire, with an income of £52,825 sold for £560,000, reflecting a yield of 9.4%. The auction also included a Halfords Autocentre in Newport, Gwent, which sold for £500,000, reflecting an 8.3% yield, and two NCP car parks.
“Our buyers will buy into any sector which they understand,” Allsop auctioneer George Walker says. “Medical, drive-thrus and car parks are all in this category and prices are strong. Car parks or similar are great because they give you that development angle. You buy the footprint and the airspace. It’s going to appeal to investors.”
At the Acuitus July sale, Travis Perkins trade stores in Rutland, Doncaster, and Oldbury sold for £1.45m, £1.12m and £800,000 at respective yields of 6.2%, 4.3% and 6.7%.
“Investors are targeting assets which are well-let at sustainable rents to brands that they feel have resilience and have good trading prospects,” Acuitus auctioneer Richard Auterac says.
Retail loses its appeal
The key reason alternative investments are gaining popularity is that high street retail, once the darling of the commercial auctions market, has become less and less desirable to investors.
According to Allsop, the proportion of retail assets selling at its auctions fell from £232m (71% of the total sold) in the first half of 2018 to £202m – 68% this year – as investors continued to shy away from the sector.
According to retail analytics company Springboard, nearly 3,000 shops shut on UK high streets in the first half of 2019, with fashion chains Karen Millen and Coast among those announcing closures.
Shopping centre and high street landlords have been asked to lower rents on unprofitable stores as struggling retailers seek ways to keep their businesses afloat and cut costs. On top of that, many major retailers have been using CVAs to reduce rent liabilities and close under-performing stores, arguing they would collapse if they could not strike a better deal. According to PwC, between 2016 and 2019, the number of retailers that agreed CVAs doubled, including high street giants such as Mothercare, Debenhams and Arcadia.
As the drive to online shopping continues to bite, more retailers are looking to reduce their store footprint and cut costs. Halfords is also pursuing a strategy of looking to close stores if it cannot secure major reductions when its current leases expire.The group announced in May that it has 175 break clauses or rent reviews coming up over the next four years.
In June, Superdry said it would wait for leases to expire rather than requesting a CVA, stating that 70% of the group’s rental agreements were up for renewal within four years, while 40 per cent would be renegotiated within two years. If landlords do not agree to significant reductions, the company says it will shut the stores.
“We do not have too much space, we have too much rent, rates and service charge,” Next chief executive Lord Simon Wolfson said in a stark warning to landlords during the firm’s annual results in March. According to Wolfson, over the past two years the retailer negotiated rent reductions of 29% on the leases that it renewed, and it expects similar reductions over the year ahead.
But, as with all investments, bidders should still exercise a certain amount of caution when looking to buy alternatives and make sure they have a clear exit strategy.
“The biggest downside with ‘alternatives’ is that these are often specialised properties so it can be harder to find an alternative use if everything goes wrong,” says Prideview’s Patel.
