Rising interest rates, which we are all acutely aware of, have affected the commercial property market as well as the residential market. Savage Silk represent a number of property companies and pension funds with property interests from a handful of shops and offices to portfolios worth tens of millions.
By way of an oversimplified example, if you buy a property at £5m with rental income of £300,000 that’s a 6% return. If you borrowed £3m at 4% that’s interest payments of £120,000. Gross Income less outgoings is £180,000 profit. Change borrowing interest rates from 4% to 6% and then £180,000 reduces to £120,000. To make the deal work, the buyer would look for (at least) a 9% return on the property and to achieve this the price would have to come down to £3.3m (assuming the loan to value remains the same). This is how the increase in interest rates has a negative effect and property values.
Of course every deal has a different driving force. One client of ours remortgaged a year ago due to changes in personnel at the company, which proved very useful. Another client sold its highest value asset a year ago in anticipation of rate rises to reduce loan to values.
There are still deals to be done. We had a client who bought a suburban property at auction and shortly afterwards completed a 10 year lease achieving a healthy return for them.
Another client bought a property subject to lease as an investment. The return on the deal wasn’t great, but the property was next door to several properties they already owned so long term it is to their advantage.
The property investment team at Savage Silk have a significant amount of experience and if we can assist you with your deal don’t hesitate to contact Paul Earnshaw on 0345 209 4703.
Paul Earnshaw, Partner and Head of Commercial Property