Seven pitfalls to avoid when buying commercial property

Having been in the game for more than 35 years, we have been in the privileged position of seeing investors both succeed massively in commercial property and also fail miserably. A heated discussion in the Prideview dealing room resulted in the following errors being identified as the ones that crop up time and time again. If only we had a pound for every time we had advised our clients against going down some of these roads. 1 Chasing yield In commercial property, yield is the name of the game and whilst achieving a high yield matters, we never advise investors to focus on that over other key fundamentals – at the end of the day if your property becomes vacant, that yield will drop to zero, or could even become negative if rates become payable. 2 Not reading the special conditions Essential reading for any auction bidder, the ‘specials’ may only be fully submitted on the day of the auction itself, and whilst some conditions, such as requiring the buyer to cover the seller’s legal costs, aren’t world-ending, we have seen several sellers place fees of up to 1.5% of the purchase price into the specials, which form part of the legally binding auction contract. 3 Missing break clauses All sellers and their agents have done it – highlight the lease expiry date whilst burying the break clause in the small print. Since the 2009 credit crunch, we always advise our clients not to look beyond a break – assume it will be exercised. One unlucky bidder on a £300,000 blue-chip restaurant found this out recently in auction. Thinking he had bought a property with 10 years remaining on the lease, he discovered that there was actually a break after five years – meaning effectively he had overpaid by about £50,000. 4 Banking on vacant possession values Most lenders require a formal vacant possession ‘VP’ valuation to go alongside an investment valuation. What investors often don’t realise is that while they have been quoted a loan of 75% LTV, this may be subject to the loan amount not exceeding the VP value. For many blue-chip investments, there can be a large gap between these two valuations. The long and short of it is that a loan quoted at 75% can easily come in at 60-65% if the property becomes vacant, leaving the landlord to cough up the difference – or default. 5 Over-rented properties Unlike with residential property, commercial properties can take some time for rents to return to market norms, because renewals typically take place every five or 10 years. Woe betide any investor who presumes that just because a tenant has been paying a rent for the last 10 years, they will renew on those terms, or that a future tenant will match. Do your homework on the rents and make your offer accordingly. 6 Over-analysing an opportunity Whilst being thorough is great, a good deal will not wait for you forever – and especially not if you pore through every legal document without taking a commercial view on any grey areas. Sometimes the more advice you take, the more hesitant you can get. All we say is be decisive either way and at least you won’t burn bridges. 7 Not taking the right advice This point is not in contrast to the one above. The ‘right’ advice can only come from someone who has bought property themselves, and someone who has felt the pain first-hand of the mistakes outlined above. Taking advice from someone who has never invested before, or a professional whose indemnity cover is tantamount to a gagging order, will only get you so far. The right advice may cost you now, but it will save you a lot more in the future. Nilesh Patel is director of the Prideview Group