What are canny investors buying at auction?

With the prospect of turbulent times ahead for UK property, what sort of investments are canny buyers purchasing? EG caught up with three experienced auction buyers to find out their strategies. Kishor Ruparelia Wembley-based private investor Kishor Ruparelia expects prices and rents to keep falling for the next two years as the UK goes through a painful recession. But that isn’t stopping him from continuing buying and selling properties at auction. “What I do is I go through the auctions catalogue and I look at all of the properties listed. I try to find properties which are under-rented or which have a development angle,” he says. “Then I narrow it down to about 10 or 12 which I would like to buy and I hope to come away with one of them.” It’s a process the 63-year-old Ruparelia has been going through for the past 35 years. “At the moment the market is tough,” he says. “A few years ago I would buy properties at auction and sell them again two months later at a profit. Now it takes at least eight months or a year for me to be able to do that and mostly some you just have to keep for the long term. “I used to be able to sell to other investors but these days it’s usually end-users who are prepared to buy and they take time to be able to get the finance,” he adds. “I used to be able to sell easily at auction but now if I sell two to five properties a year I’m happy and that’s usually by private treaty.” Ruparelia, who owns around £15m of commercial and residential property in his own right and also buys and manages properties on behalf of his business partners, is currently focusing on opportunities mainly outside London and on smaller lot sizes. Recent purchases include two shops in Epsom let to a hair salon and a dry cleaner with residential above which he bought for £465,000 in March, six flats in Bedford which he bought in May for £682,500 and a Kwikfit in Ellesmere Port, Cheshire, which he bought in July for £522,500. “At the moment I would not usually want to buy clothing retail,” Ruparelia says. “There are lots of shops closing down and, even if they stay in business, they are likely to be asking for a rent reduction at the next rent review.” However, for smaller retail lots, priced at less than £500,000 offering personalised services such as hairdressers, nail salons and dentists, it is a different story. Local supermarkets and restaurants are also attractive. “I don’t mind taking chances on smaller lots, especially if I can see an angle,” he says. “The market has weakened a little but for the sort of thing I’m after there is always a lot of competition. Of course I want to make a profit, but if I can’t sell then I keep them and take the income.” And, even with his pessimistic predictions for the short-term future, Ruparelia says he plans to carry on trading. This year he made his first online auction purchase through iamsold.com but he says he usually prefers to visit ballroom auctions in person. “I enjoy the day out of going to the auction. You can see who is bidding and if they are genuine. You can usually meet the sellers as well. Even if you get outbid, you can go and ask the successful bidder their strategy,” he says. “For me it is like a hobby.” Mark Smith “It’s a bit like the architect who sketches a house in five minutes,” says serial investor Mark Smith. “You say to him that only took you five minutes. But he replies, no, it took me 30 years.” Smith is chief executive and founder of London & District, a small developer  which has been investing and managing London property portfolios for the last 30 years. Smith, who originally trained as a quantity surveyor, founded the company in 1984 after a stint as an estate agent. He rode the 1980s boom and survived the subsequent crash in the 1990s, creating a niche for himself as a dealer developer, building up a substantial portfolio of around 100 flats and other assets, mostly located within the M25. “We try to buy quirky stock,” Smith says. “Properties with issues that the regular buyer either doesn’t understand or doesn’t have the patience or financial resources to unravel it in the long term. It’s stuff that the ordinary buyers out there can’t be bothered with. We try to see the hole in the doughnut that no one else can see.” These include properties with planning defects, regulated tenancies, underperforming houses in multiple occupation (HMOs), problem portfolios and the like. “We like to buy off-piste,” Smith says. “Then we work on tidying up the planning consent, reconfiguring the house or trying to find a better deal to suit the tenant.” For Smith, the political uncertainty surrounding Brexit has created buying opportunities at auction which had been all but swallowed up by owner occupiers while the market was rising. “Until a year or two ago we weren’t buying at auction because the market was so buoyant,” he says. “It was meaning that the likes of us just couldn’t get a look in. Now the market sentiment has changed we are able to acquire stock at a sensible level, and some to hold for the long term.” Since January, Smith says he has bought 26 lots, although many of these have been through off market deals rather than through auctions. Recent purchases include a terraced house in Plumstead, south east London which Smith picked up at Savills’ May auction for £344,000. It was let on an assured shorthold tenancy with an income of £16,800, reflecting a yield of 4.88%. “It didn’t appeal to owner occupiers because it was tenanted and it didn’t appeal to income buyers because it had a sub 5% yield,” Smith says. “We held onto it until the tenant moved out and now we’re marketing it north of £500,000 to end users.” At the same auction, Smith purchased a freehold end of terrace building arranged as two flats and a double garage for £420,000 which he plans to refurbish and sell on. “I do more due diligence than people think,” Smith says. “I’ve been in this business for over 40 years. I’m 61 now so over the years I’ve developed a reputation as a reliable buyer. If I’ve agreed to buy something then I make sure I go through with it. I like to think I’ve got a reputation for playing straight.” And he is selling stock too. Smith has sold two houses in Chiswick which he bought at Allsop’s May auction to speculative developers. As his portfolio has grown, Smith has increased the size of his team. It now includes a land buyer, a property manager, a lettings manager, an in-house lawyer, a maintenance manager, a part-time finance director and a PA. “London & District has substantial overheads,” he says. “Although these are mostly covered by our long-term rental portfolio, every 1 January, we are still staring down the barrel of our running costs so we have to get busy.” Although he tries to flip some properties, selling them just days after buying them, Smith also holds some part of his portfolio for long-term income stream. He has owned one of his properties in Queen’s Park since 1988. “Some of my investments I have deliberately bought to hold,” he adds. “I try to be like a tunnel running through the Alps. If you hold something long enough, it doesn’t matter if the market dips by 10% or 20%.” So, what would Smith not buy? “I wouldn’t buy single flats in high rise local authority blocks,” he says. “I try not to get sucked into buying big ticket stuff too. For that sort of investment there is usually only one exit route and I like to have three or four possible exits. I’ve found the lower end of the market is usually the safest and the best performing.” Neel Shah “We’re defying gravity,” says Neel Shah, managing director of North London-based Deekay Investments, a small commercial property company with a £440m portfolio dotted across the UK. Unlike a number of its competitors and despite a series of high-profile high street store collapses, Deekay is following a strategy of continuing to invest in high street retail. “The fundamentals are still there for some retail space,” Shah says. “We like to get away from the most popular 10% of stock coming up at auction because we think it is a crowded space that is populated by armchair investors. “Then, we get our sleeves rolled up and, with a bit of digging for the right stock, we find the deals that work. We take the view that there is a price for everything.” Deekay’s most recent purchase was a 2,360 sq ft high street shop in Leigh, Lancashire, let to EE for £34,000 a year on a lease expiring in 2024. The firm picked it up at Allsop’s May auction for £260,000, reflecting a healthy 13% yield, facing little competitive bidding. The firm has been selling too, offloading a 1.3 acre Iceland store in Heywood, Greater Manchester for £1.07m, reflecting a 6.26% yield and selling a ground rent for a 0.173 acre plot in Bolton for £105,000 reflecting a yield of 3.13%. The Iceland store was part of a portfolio bought at auction between 2015 and 2017 which Deekay has been gradually breaking up and selling while the ground rent investment was also part of a larger portfolio which it has been holding. “We look at what other people are doing and we try to do the opposite,” says Shah. “At the moment commercial ground rents are flying off the shelf because there is a flight to safety, so we are taking advantage of that. For that same reason, well-let convenience stores are also selling well at the moment. Even if there is a recession, people will still need to get their milk and bread and the internet isn’t taking away that local convenience store market.” At the moment Deekay is also interested in acquiring small modern warehouses which could be used by last mile delivery operators. It considers the demand for these sorts of operations is likely to increase over the next few years as firms like Yodel and Uber Eats continue to disrupt the market. On the other hand, the firm has little interest in acquiring residential investments. “Residential investment just doesn’t make sense at the moment,” says Shah. “The politicians are proposing too many tax and policy changes. Until the government decides to ease off regulation we won’t be looking into that market.” Overall though, Shah says that his company prefers to hold its investments for the long term rather than trade. “We take the view that over time buying and selling properties gives an inferior result to holding the same property,” he says. “If you take into account all of the costs involved such as stamp duty and capital gains tax there really isn’t much difference.” It is certainly a strategy which has stood the test of time. Shah joined the company 15 years ago to enable Khim Chandaria, Deekay’s now 86-year-old founder, to take more of a back seat. But he adds that Chandaria is still very much part of the team and overseeing operations. So what does the company expect the market to be like in the months ahead? “We’re expecting this flight to safety to continue until at least January,” Shah says. “At the moment the political landscape is very uncertain. The property market is like a ship rather than a car. People are currently completing deals they made two months ago. So, whatever happens it will take another few months for the market to catch up.”