For the past few hundred years, if you owned a commercial building in the centre of London, there was a good chance that it was worth more with vacant possession that it was tenanted. That is because the rent paid by the tenant was probably lagging behind the market rent so if it became empty, you could let it for a bit more - maybe a lot more.
Yes, the value of a commercial building depends crucially on the rent, the credibility of the tenant and the terms of the lease. The vast majority of commercial buildings are owned by investors. That Sainsbury supermarket down the road is NOT owned by Sainsbury, it is owned by a a guy who lives in a little terraced house in Salford and drives around in a 15 year old car - you don't get rich by buying fancy stuff.
And a lot of buildings are owned by companies run by men in Armani suits - spending other people's money. The shareholders also drive 15 year old cars but for a different reason.
But right now ( April 2023 ) even in central London, a vacant commercial building may well be worth less than if tenanted except in special circumstances ( eg it can be knocked down and 50 flats built on the site ). Specifically, an average empty office block in an average position is a catastrophe. It is probably worth about half, or maybe less, than an identical block standing next door to it but well tenanted. This is because of Working From Home - thanks to the internet.
If you work from home one day a week, ultimately the demand for office space will drop by 20% - two days a week is 40%. So if a city contains 100 office towers, 20 of them may well become empty - attracting huge empty rates and various other outgoings.
Not just offices but shops too. An empty shop in Oxford Street is now worth about half (if you are lucky ) of what it was worth ten years ago. Value destruction on a huge scale. Thanks to the internet.
The further you get from London the worse it gets. In Scotland people are actually demolishing brand new office buildings because they have no value and cost a fortune in empty rates.
So shops and office buildings are potential disasters. So are huge brand new warehouses let to Amazon and similar companies because the buyers all got carried away and paid far too much money for them. Endless property companies had three day conferences in posh hotels to decide strategy and decided that internet warehouses were the way forward.
Phil and I had a sandwich in Costa and decided to keep our heads down until it all blew up ...
The only area of cheer is in reasonable sized factories and warehouses where the market is very strong - meaning they are very hard to buy because there is always an optimist with more ( borrowed ) money who will outbid you. Even now with interest rates having gone right up it is very hard to buy a decent tenanted industrial building.
So I have reverted to where I was back in 1980 - buying vacant industrial buildings with problems. Typically you buy it for about a third of the tenanted value and spend a couple of years jumping through hoops and doing bulding work and then letting it to a decent tenant on a decent lease.
A couple of years ago we bought an empty 50,000 sq ft shop right in the middle of a nice mall in Greenock for £200,000. A few years previously it had been sold for over £5m. Are we making money out of it? Well, as Maynard Keynes said, a long term investment is a short term bet that went wrong ... and this is looking like a long term investment right now.
A mall in Kirkcaldy recently sold for about £300,000. In 2005 it had been bought for £10m
I could go on but that is enough for now
Bob Cory
Modified on 12/04/2023 at 10:58:58 by ℗ Bob Cory