The year that alternatives to retail became mainstream

For the private investor, 2018 was the year when alternatives to high-street retail became mainstream, writes Nilesh Patel, a director at Prideview Group. With a tough retail climate – exasperated by unrelenting uncertainty surrounding Brexit – investors are now questioning what exactly defines a quality commercial property investment. More variety is being offered for sale as a result and for the traditional retail lots, high yields continue to attract many opportunists. As a result, auction sales results were pretty strong with Allsop recording 85% in 2018 and Barnett Ross more than 90%. Our transactional activity remained strong too, with 114 deals done at an average value of £1.1m. One quarter of these deals (£31m by value) were done by auction – and of these, common alternatives to retail such as restaurants (21%) and supermarkets (15%) were joined by less conventional categories such as industrial (13%) and medical (5%). In terms of geography, 97% of our auction deals were located from the Midlands to the South Coast – a reflection of how the difficult retail landscape has hit the northern regions badly. There are a number of key themes that we believe will shape investor behaviour in 2019: ■ Sustainability/value-add options: Given the nature of CVAs in particular, it feels as if any tenant could be on tomorrow’s front pages, and accordingly investors want properties rented at a level at which they can easily be relet, or where alternative uses or redevelopment can be realistically undertaken. ■ Lending: Several lenders are pulling back from the market. Fortunately the market is nowhere near as highly geared as it was 10 years ago, so the impact of this will be that fewer investors will go for £1m-plus lots. ■ Taxation: The punitive residential buy-to-let tax rules are starting to bite, and anyone who has just filed their 2018 tax return will have seen that only 75% of their interest is now deductible for tax purposes. This will reduce to 0% in the next few years and will continue to push more investors into the commercial market. ■ Budgets/sectors: Investors may not want to risk all their money in commercial this year, and while the hunt for alternatives continues the reality is that larger asset classes such as industrial and office will continue to be out of reach. This means the likes of convenience stores and medical investments, especially under £1m, will remain in demand. Convenience stores have been the most popular asset class we have dealt in since the 2016 Brexit decision – and the Co-Op has been one of the most popular brands, thanks to its recent refit programme. We picked up a Co-Op in Orpington at Allsop’s December auction for £402,000 (a 5.1% yield). To acquire such a unit in the London area, with nearly 10 years unexpired, for under £500,000 is a rarity and it is no wonder that, in spite of all the doom and gloom, bidding for this was very competitive – it sold 25% over guide. Another asset that typifies the kind of deals we are looking at is that of a Metro Bank (plus maisonette) in Bromley, which we acquired for £1.5m (a 5.5% yield). Banks are far from in favour these days, but the buyer of this long lease investment is a customer of Metro Bank and believes it has a place on the high street. The separate maisonette is not subject to residential stamp duty and offers income diversification. The neighbouring properties on this parade all sold in the same auction at similar rents, meaning this sustainable London shop and flat investment looks a fair buy at 5.5%. The world has changed from what it was a decade ago. Brexit or no Brexit, life will go on after 29 March and what matters to investors is how compelling the long-term story of a particular property and its vicinity is.