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From Special Report:

Time to tap into the commercial property market

Outside of central London, there is generally less competition for ‘secondary property’ investments

By Michael Hardman | Published Feb 25, 2013 | comments

Non-UK prime property, or ‘secondary property’ as it is more commonly known, is institutionally unfashionable, but for those willing to take a closer look they will find generally less competition for good assets.

Aside from prime central London based commercial assets, all secondary assets are classed with a high yield that offers little or no hope for rental or capital value growth.

This view is perhaps a little short sighted as firstly you have to place your assets into certain categories: location, covenant strength and type of property to name just a few of the components worth considering.

But in the past 25 years strong secondary assets, if managed correctly, have generally offered a consistent return of 8-10 per cent a year.

During this period there have been several peaks and troughs in the market that have created an above average return at times (2003–07) and falls that in 2007-11 were as much as 40 per cent in some cases.

There has been an overreaction in some quarters to the crash in property values in both the commercial and residential sectors.

It is not an investment vehicle that you can make a short-term play out of and events in the past few years have indicated that there were too many short-term players in the market that were driven by yield compressions and were allowed to re-gear on stock that had no real chance of performing.

With values in both commercial and residential sectors some way off their highs and an increasing number of people predicted to rent residential properties in the coming years, now could be a prime time to get back into the market.

However, it is vital to look at this type of investment as a medium to long-term opportunity. Too many investors looked at the short-term gains in the past 10 years and that is not in the DNA of property investment.

It was the short-term approach of many investors that played a part in the recent market crash coupled with the banks aggressive lending policies.

That ship has sailed and it’s time for managers to roll up their sleeves and work assets hard for the medium term.

Some locations outside of London are high quality, others less so, but both are valued on a similar basis, which presents opportunities.

Location is a key factor when considering a secondary property investment – any view must be based on the location being in demand over the long term.

The “bigger picture” view is the key and many sound properties have failed to perform as the location has been poor.

Factors such as access to the motorway or simply being on the wrong side of a large regeneration programme can be enough to really knock the quality of the property’s location.

Secondary property can provide a secure income and there is the opportunity to create value through active property and asset management from the tenants.

However, there is a huge surplus of secondary stock in some areas which will add no value to a portfolio. There is also a lot of poor stock out in the market that is tarnished due to factors such as poor location, high-void rate and poor conditions.

Knowing the location and type of tenant is critical and evaluating the opportunity over time and asset managing the stock will strengthen value.

There is always a risk attached to secondary property, such as the strength of the location diminishing due to other developments nearby, vacating tenants and the ability to re-let, dilapidation of the property and terms of leases; all these factors need to be considered when looking to purchase a secondary investment and careful due diligence on the location, tenant type and condition of the property needs to be done in detail before making any form of acquisition or partial investment.

Michael Hardman is managing director of the Longcross Property Investment fund

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