The property investors making a commercial sea change

We know the British “do like to be beside the seaside” but when it comes to property investments, we do like to buy beside the sea. While “summering” in one’s holiday home, what better way for the well-heeled property investor to spend a rainy day than at the local high street picking up the odd commercial asset for their portfolio. The trend for investing in holiday locations has increased with the lack of affordable opportunities around the major conurbations and the ability to draw funds from SIPPs, combined with the staycation trend and increasing second-home ownership. Mike Oldrieve, of Vickery Holman, which has offices in Devon and Cornwall, says when selling an investment property in towns such as Dartmouth or Salcombe, he expects more than half the bidders to be from outside the area – investors looking to purchase where they know through their holidays. However, he estimates fewer than a quarter of the bidders for a similar property in a non-tourist town such as Newton Abbott would be from “up-country”. James Lutton, of Legat Owen in Chester, has a patch that includes the Gwynedd Peninsula where, according to ONS figures, more than 10% of residencies are second homes – the highest regional rate in England and Wales. He says the recent sale of a property on Anglesey, which has the sixth-highest rate of second-home ownership, is a typical example of the demand for holiday town investments. He says: “We were selling a Spar store in Beaumaris and when details circulated around, half the enquiries were from property companies and funds. But when it came to the sale, around 90% of bids were from private investors, many of whom were second-home owners, as was the eventual buyer.” The store went for £750,000 at a yield of 5%. Outsiders with local insight Having a holiday home in an area gives an investor an insight not available to other remote purchasers, meaning they often outbid property companies. And they often have a purchasing power above the locals. Their budget may get them a property that is out of reach in their home town. Lutton says: “For £500,000 in Chester you’ll get something off-pitch; in Abersoch you can get the best shop in town.” However, purchasers will not buy in any old location: decisions seem to be based on where they would visit. Locations with the highest proportion of second homes in England and Wales Gwynedd North Norfolk South Lakeland South Hams Isles of Scilly UA Isle of Anglesey Source: ONS Philip Woolner, managing partner at Cheffins, in the Cambridge office, says it recently sold a property in Saffron Waldon to a second-home owner and offered them a very similar investment in Havering. “They didn’t want to know,” he says. “They want something that looks good in their portfolio and will opt for somewhere like Southwold because they like to go there themselves.” Guy Gowing, managing partner at Arnolds Keys, which covers North Norfolk, the second-most popular area for second homes, says: “We recently sold a high street property with a sub-5% yield to a buyer with a second home in Burnham Market. She specifically wanted that location as she’s happy there.” He says similar investment lots with comparable covenants in more mass-market tourist destinations such as Great Yarmouth will achieve 8-10% yields compared to sub-5% yields in the more refined South Norfolk and Suffolk coastal towns. Year-round destinations win While much of this is down to aspiration, it does make investment sense. Laura Gardner, of Miller Commercial in Truro, says: “Investors just go where the money is, and the money tends to be in the areas where they have holiday homes.” However, this may not be the case in less affluent holiday locations. Scarborough and East Lyndsey are 10th and 12th in the second-home ownership table but Lincolnshire’s key tourist towns, such as Mablethorpe and Skegness, are more cod roe than caviar. James Butcher, of Banks Long & Co in Lincoln, says the smaller more refined coastal towns there offer little interest to investors due to limited demand and a reluctance to gamble on holiday towns with limited seasons. “Buyers here prefer to go for the established year-round towns,” he says. Demand from retailers for premier locations combined with rarity of stock has pushed rents up. Vickery Holman’s Oldrieve says Dartmouth – where around 20% of residences are second homes – at £70 per sq ft Zone A is probably around £30 more than its true level. And Legat Owen’s Lutton points to Joules recently paying a £500,000 premium to secure a store in Abersoch high street. While occupier demand is pushing down yields, private investors are not backing away. Miller Commercial’s Gardner says a town such as St Ives – 25% second homes – is fairly overpriced. “But it continues to be attractive because investors are confident they can relet if it becomes vacant,” she adds. Trophy tenants As well as location, buyers want trophy tenants, with investors happy to pay a premium for retailers they like to be associated with such as Fat Face or Musto. Gardner feels this yearning for brands is natural, as many inexperienced property investors let emotion dictate investment choices rather than economics. Or, as Lutton puts it: “These high-net-worth individuals don’t come on holiday and shop in Poundland. But they do go to Joules. That’s what they understand and that’s what they buy.” If an investor can source the best location with the best tenant, then the icing on the cake is if it includes a holiday home. Oldrieve says: “We sold Henri Lloyd in Salcombe with flats above – the purchaser kept one for himself. It was the perfect location above a shop he loved and basically gives him a free holiday home.” Rural Industrial Markets “Give us a small industrial park on the Isles of Scilly and it would sell in a shot. Imagine the ‘vital’ expense account trips the buyer would make,” jokes Mike Oldrieve of Vickery Holman. But after selling Cornwall’s largest shed in less idyllic Roche recently, Oldrieve appreciates that wherever that estate was there would still be keen interest, albeit with less regular inspections. This is because the rural industrial market is following the national shed investment boom, which shows no sign of stopping. The Roche deal saw Highcroft buy the 250,000 sq ft Wyndeham print works, leased until 2021 at £500,000 pa, for £4.2m, a yield of 11.2%. He adds: “We had lots of interest from national propcos because they just cannot find that type of stock.” Laura Gardner, of Miller Commercial in Truro, says that with minimal occupier demand for rural offices and the malaise of the wider retail market, increasing numbers of investors starved of stock in the South-East are looking to South-West sheds. But in rural areas, key occupier demand is for small and medium units and rarity means rents are high. Oldrieve says smaller units can achieve £10 per sq ft – £2 more than a similar property in Exeter – even if it is just being used to sell surfboards. Gardner puts prime Cornwall yields at around 6% but says the problem for investors is lack of stock and even those high rents do not encourage speculative development in a region with high build costs. At the other side of the country, Robert Flint, of Arnolds Keys in Norwich, says: “Around 2009, the market here was in the doldrums. Now it’s close to 100% occupancy with rents rising around 5% year on year.” Flint puts rents at around £5.50 per sq ft, up to £8.50 for smaller units and yields at 8-10%. As with Cornwall, development in Norfolk is not yet quite there. But Flint feels this may change as EPC regulations come into force, rendering many older rural buildings obsolete. “Canny developers are getting in now as lots of stock needs to be renewed and many occupiers will require new accommodation.” This article was first published on 14 July 2017