Personally, I have always found the numbers for new build no where near as exciting as those for buying old commercial properties and refurbing. We have a couple of sites with new build choices, but have never got around to building, at least not yet.
In fact I would go further and bet if you asked most private commercial property investors to reflect on which has provided the best returns, most would agree that the best ROI has been from older buildings. There will be exceptions of course, but in the main fully refurbished older buildings can cost a lot less per square foot than new build.
Here are some of the main drivers:
Tax savings!
There is a simple but often overlooked tax advantage of buying old and refurbing. For example if you spend £600K on buying or developing a new building and then rent it out, you will have a nice shiny, new, specially designed building which cost £600K. However, if you buy an older building for £300K and then spend £300K on doing it up, there will be quite a lot of the expenditure that can go down as repairs and replacements which can immediately be taken off your profit and loss. Other expenditure on items such as plant and machinery could be capitalised so you can get another tax saving on profits with the current capital allowances. This can mean a saving of 10-15% compared to the new build price. So the project might in real terms cost £540K rather than £600K. You will of course need to be making a profit to benefit from this.
It is particularly good if you are building a portfolio and keeping the building for the longer term. Remember though these activities only delay the tax, they don’t prevent it. The impact of tax would still be felt at a future exit point. As usual, seek professional advice before making decisions (don’t blame me).
These strategies will not have much impact if you are flipping. Developing or re-developing without holding is not investment it is a trading business and corporation or capital gains tax will be applied at every tax crystallisation point which will slow you down dramatically.
..don’t let your ego get in the way of a good deal.
Is your Commercial Investment Strategy recession proof?
A wise mentor I was lucky to have repeatedly told me, “it does not matter how pretty the building is, it is about how much you can charge compared to the next guy!” If the market is flat or in a recession, have you bought into the market at a level where you can charge a competitive rate and still make a return? In other words don’t let your ego get in the way of a good deal. Building new will often put you in at higher price point which could be fine whilst the market is climbing but as soon as the market drops you might have little room to manoeuvre. Every recession pushes recently built commercial properties onto the market for a “price adjustment” usually at the cost of the original investors. It can be a deep bath.
Older buildings can simply cost a lot less.
Being involved in building new properties can be very exciting and creative, but they cost at least £1000 – £1500 per m2 to build (depending on type) and I have seen many empty commercial office buildings sold for less than £100 per m2! Granted, you will have to invest some money to make the necessary changes, but as long as you have a strategy to attract new rent paying customers to the older building, it would be difficult for the new build competitor just down the street to compete with your pricing. There might be a glut of property available to rent on the market but you will still be able to offer space at a competitive rate when price is king for companies downsizing or cutting costs.
Project turnaround: Speed of your Money.
Building new can take a long time and finance can be more expensive. How long can you last without cashflow from your investment? Every month or year the building is not ready costs you money. With older properties it is often possible to get income coming in from day one. This can help fund some of the improvments you need to make. Banks will lend more readily against the income and might even work with you, increasing lending as the income increases. Most importantly the speed of your investment return is greatly increased.
Creativity
If you are going to buy older properties bring your creativity! There can be so many ways to reimagine older properties. Can you split them, change use in part or in full, find a left-field approach that nobody has thought of, add space, remove space to make the remaining footprint work much better? Is a roof garden or social space possible, can you bring in the local community to an otherwise forgotten space? The possibilities are there to be imagined.
Personally, I find this part hugely rewarding and enjoy looking at the possibilities on a daily basis. This does mean plans can change on site, much to the disgust of our team trying to complete the project! Older buildings do have a habit of slowly releasing their character when you are peeling back the layers, and I think it is important to respond to new opportunities when they reveal themselves.
A great ROI does not care about your feelings or emotional state, it is all about the numbers, pure and simple.
There are some exceptions to this overall viewpoint, including city centre sites with buildings that are no longer suitable. Let developers or institutional investors take the risk of re-building these spaces.
Many seasoned residential investors would agree that it is not the shiny new trophy properties that have the best cashflow but the older, more ordinary, mundane residential properties, perhaps ex local authority or investments in secondary locations. It can be just the same with Commercial Investment. A great ROI does not care about your feelings or emotional state, it is all about the numbers, pure and simple.
Happy hunting.
