IS NOW TIME TO INVEST?

Investment News

Private Clients advised by FHP’s Nottingham Office have recently acquired a two storey self contained office building on Phoenix Park, Nottingham in an off market transaction where Jones Lang advised the Vendors.

Whilst full details of the transaction have not been disclosed it is understood that the building which is occupied by E-on is let for a further five and a half years on fully repairing terms with the sale price purported to reflect a net initial yield of circa 13% per annum.

This compares with sales of similar office buildings undertaken in 2007 / 2008 prior to the Lehmen Brothers crash where similar transactions were structured at a yield reflecting an annual return of circa 7% per annum.

This radical shift starkly illustrates the problems facing the commercial property market but similarly presents an opportunity for the correct Purchaser hence it begs the question “is now the right time to invest?”

John Proctor of FHP advised the acquiring Investor and he summarised the Investor’s position quite clearly by saying:-

“Our Client is an experienced Property Investor who balanced the weakness of the current economic climate with the return provided by the building, the underlying capital value and prospects for economic recovery over the next five years.  Phoenix Office Park has seen higher vacancy rates than other out of town office locations in Nottingham as a consequence of the downturn in the economic climate and by virtue of the fact that the site was principally developed in the 1990s and early 2000s and by implication the natural lease cycles meant that lease ends have occurred over the past three years which have exaggerated the natural wastage that has been seen elsewhere in the market through rationalisation and downturn in financial fortunes.

Our Client was fortunate enough to be able to employ cash and therefore is immediately receiving a true return way in excess of alternative forms of investment – this level of return is however only guaranteed for 5.5 years and he recognises that at the end of that period of time the Tenant may vacate and that if it is relet it will relet at a lower rental than that which is currently passing.

His view, and this is substantiated by our own, is that ignoring any economic upturn our Client will be in a position, in such event that the Tenant vacates, to be able to offer the building into the market at a discounted rental and still receive a high return – the purchase price therefore underwrites the risk.

Alternatively our Client can sell the freehold interest and the erosion in values means that the base value on which he has purchased again gives the Purchaser comfort that he should still be capable of selling the property for at least the price at which the property was purchased in the first case”.

Both FHP and Matt Smith of Jones Lang’s Nottingham Office concur that the lack of available finance and nervousness of commercial property with shorter lease lengths means that there is unlikely to be a recovery in value within this sector for the foreseeable future and therefore the opportunities for cash rich Purchasers to purchase property at such a high rate of return will continue to exist.

Matt Smith who advised the Vendor commented:-

“Our Client had owned this building for nearly ten years and benefitted from a good solid commercial return provided by E-on’s tenancy so the property had looked after them well.

Whilst the purchase does reflect an attractive yield and one can see here why an Investor would purchase by virtue of the good location an Investor still needs to heed caution and fully understand the inherent risks.”

Both Agents have indicated that there is an increase from high net worth individuals and organised Investors to invest in property which can provide a high rate of return and a strength of income whilst the market remains challenged.

The questions that we are all asking remain unanswered and whilst none of us could have predicted the depth of the financial crisis and impact it would have had on the commercial property market at the outset one would fully hope and expect that one will see stability and gradual strengthening within the commercial property market over the next five years.