Assetz® News - Residential Investors Think Commercial Property is out of their reach But Syndicates offer a sound solution

Residential Investors Think Commercial Property is out of their reach But Syndicates offer a sound solution

5th May 2005 |

Thousands of residential investors are missing out on excellent opportunities in commercial property, due to the assumption that they can’t afford it, reports Assetz for Investors (), the UK’s leading property investment specialist.

But with syndicates offering a share of both the costs and the risks, traditional residential buy-to-let investors whose yields have suffered in recent years (average 5%), would be mad to miss out on potential yields of between 7 - 10%. A syndicate also offers investors the opportunity to buy more expensive, better quality property, which will generate more reliable returns.

Rishabh Trasad, a 24-year-old trainee doctor, recently took the plunge into commercial property after becoming disillusioned with the residential buy-to-let sector. He had purchased six residential flats while studying in Tooting, one in Tooting and five in Leicester – all of which he sold after returns dropped. Determined to keep his money in the UK, Rishabh invested £30,000 in a syndicate with nine others through Assetz, to purchase off-plan a 2,600 sq ft semi-detached Grade A office building on Capability Green in Luton. They paid a total of £610,000 for the property, after negotiating a 20% discount on the purchase price with the developer and borrowing 60%. Rishabh is likely to make a 44% return on his original investment when the building is sold, completed and tenanted, in January/February next year.

Stuart Law, Managing Director of Assetz comments: “Commercial property has been a high performing asset class over the last few years, and is now clearly moving ahead of residential as one of the few UK sectors still growing. Investors who search the marketplace well can expect to enjoy yields of between 6.0 – 15% as well as a steady growth in value and the opportunity for uplifting many buildings to further enhance values. What’s more, the tenants are responsible for paying for any repairs during the lease, not the landlord.”

How do syndicates work?

Short-term Investment
Investors with all levels of capital from £20,000 upwards can join a commercial property syndicate, which consists of 3-15 members. By combining the capital of all the members, investment syndicates purchase off-plan commercial property at negotiated discounts (20% target) directly from the developer.

A suitable tenant is found and the property is sold, usually within a year, when it will be worth around 25% more than when purchased. Profits are distributed between the syndicate members, who are then free to join another syndicate or take the money and invest it elsewhere.

Long-term Low-Risk Investment
A commercial property would be bought with a good-quality tenant already in place at a yield of between 6% and 7%, and the rent used to pay off the mortgage over a designated period (likely to be between 15 and 20 years) according to the gearing. After the mortgage is paid off, rent can be distributed to investors as income, or the building sold according to the wishes of the syndicate members. A £35k investment in this type of syndicate could produce an income for life of around £7k pa once the mortgage is paid off in about 17 years.
Long-term High-Return/ Higher Risk Investment
An off-plan commercial property would be bought at a prospective 9% plus yield, a tenant found and the relatively high rent used to pay off the mortgage over a designated period (likely to be between 10 and 12 years). After the mortgage is paid off, rent can be distributed to investors as income, or the building sold according to the wishes of the syndicate members. A £35k investment in this type of syndicate could produce an income for life of around £10k pa once the mortgage is paid off in 12 years.

Example

An off-plan commercial office for sale at £600,000 with a discount of £30,000 from launch price, offered with a prospective yield of 9.5% pa. The syndicate, consisting of 3-15 investors, would purchase this, obtaining finance for 50% and locate a tenant during the build process of eight months using the national and local agents retained by the developer. Once tenanted, the syndicate would look to sell to an investor at a target yield of between 7% and 8%, giving a value of between £712,500 and £814,285. This would represent a capital gain of 25% – 50% according to gearing.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/1861.html. Alternatively, please see our full press release archive.