Just before memories of this year’s “staycation” are faded by Autumn’s approach, I thought I would review a recent investment acquisition for one of our long-standing clients.
It was about a year ago when said client advised that their next investment needed to help diversify the portfolio and provide some protection against any economic downturn. Their current assets were geared around office and industrial investments with a good spread of single lets and estates. Where should they invest?
Not retail – we have been advising all clients against that for years. For religious reasons, leisure investments were out and, for portfolio balance, no more office or industrial.
Logistics and trade-counter were considered but, at that time we found little value and growth potential in the stock available. Residential was acceptable ancillary to the main use but the clients were not interested in a pure residential deal. And you do not find too many warehouse or trade counter opportunities with flats above!
While wading through the opportunities that come into us every week, I spotted an investment in St Ives. Not exactly a metropolis but I have been a few times and, to be honest, I investigated further to see if I knew the building – I did not.
But while I was reminiscing, I realised that this could be an interesting opportunity. 14 artist studios and three holiday lets in the most prime of prime positions in the most popular seaside town in the UK. A stones-throw from the Tate Gallery, three beautiful beaches and the town centre. If this were retail, it would be Oxford Street!
On the downside, all leases were short-term (very short term in the case of the holiday lets). Tenants with no covenant strength whatsoever. And not the easiest place to get to – especially with the demise of Fly-Be.
But how many artist studios are empty in St Ives? There are not too many holiday lets empty either especially in the summer and, surprisingly (to me) over Christmas and the new year.
I described it to my client as bomb-proof. When would there ever be a time when this property would not be let and income-producing?
To be honest, the client was not sure if I was serious when I first put it forward. But, after explaining my thinking they trusted me enough to visit – and a return journey from the Midlands to St Ives is a serious commitment.
And when they did visit, they “got it” immediately:
There were obvious management opportunities for both the studios and the holiday cottages.
The existing income showed a very respectable return on investment with potential for reasonable short-term rental growth and more impressive growth in prospect subject to a judicious capital investment.
And, to put the cherry on the icing of the cake, the underlying break-up value was greater than the asking price, providing useful security against a Black Swan event. (Remember we were back in November 2019 – what could possibly go wrong?)
The deal was finally completed on March 11th, 2020. We were appointed to manage the transition period and capital works program – which means that we must deliver on the vision we sold – something we always like to do.
And, of course, everything went to plan for approximately one week. One happy day, in the hopefully not too distant future, I will write something that does not refer to an international pandemic. Sadly, not today.
Due to the lock-down we were not able to visit the property again until August. All the holiday lets remained empty for four months. When I said bomb-proof I was not expecting this.
But, all studio tenants remained, paying their rent on time with a little help from the new landlord where needed.
And when the lock-down was lifted, we were in the mid-summer holiday season with international travel mostly out of the question. Guess what happened to the holiday lets? Ballistic!
So, on this one we have been unlucky and lucky, which is only fair. But the purchase decision made, based on client instructions to diversify and find a solid, income producing investment with a very low vacancy risk and real prospects of both rental and capital growth, was sound at the time.
And without wishing to invite hubris, it looks inspired now!
No matter the covenant strength of your investment, you are only a short CVA away from that 25-year lease being torn to shreds and replaced with something that your bank would never agree to lend on. Or worse, 100% vacancy.
Maybe it is time to re-assess investment in commercial property?
