Cut­ting your teeth on UK com­mer­cial property

In­vest­ing in den­tal property might not be the first port of call for off­shore property in­vestors, but pun­ish­ing ex­change rates de­mand that bud­get-friendly al­ter­na­tive op­tions be ex­plored. dema

Finweek English Edition - - NEWS - By Glenda Wil­liams ed­i­to­rial@fin­week.co.za

cour­tesy of puni­tive ex­change rates there are not many of us who can now af­ford to buy property in the UK, South Africans hav­ing lost half their wealth in the last six years as a re­sult of cur­rency de­cline. Lon­don es­pe­cially is mostly out of reach for the ma­jor­ity of South Africans.

“Ev­ery­one is in­ter­ested in Lon­don. We get five or six calls a week, com­pletely un­so­licited and es­pe­cially for the ‘bil­tong belt’ ar­eas like Wandsworth, Put­ney and Rich­mond. But prices here are up­ward of £600 000 (R13.1m) for a one-bed­room unit and for South Africans it is just a bridge too far,” says Chris Im­mel­man, MD of Pam Gold­ing Prop­er­ties In­ter­na­tional and Projects Di­vi­sion. Less pro­hib­i­tively priced op­por­tu­ni­ties in the res­i­den­tial sec­tor oc­ca­sion­ally show up on the radar (see box), but find­ing af­ford­able in­vest­ment op­por­tu­ni­ties for South Africans in­creas­ingly re­quires ex­plor­ing al­ter­na­tive op­tions.

It’s an op­tion that may not be front of mind, but in­vestors de­ter­mined to pursue the UK property mar­ket can sink their teeth into den­tal property from £125 000 (R2.7m) that guar­an­tees the in­vestor an in­come stream for 20 years, Im­mel­man tells fin­week.

In the last few years, the den­tal sec­tor in the UK, val­ued at R5.8bn, has shifted from an in­for­mal ‘cot­tage in­dus­try’ to an ef­fi­ciency-driven mar­ket sec­tor that at­tracts in­vest­ment in­ter­est from both cor­po­rate and pri­vate in­vestors. The UK cor­po­rate den­tal mar­ket has grown dra­mat­i­cally be­tween 2010 and 2014, and was es­ti­mated to be worth around £1.3bn (R28.3bn) in 2013/14, ac­cord­ing to a re­port by Laing Buis­son.

“Up to a few years ago the den­tal busi­ness was very reg­u­lated with lim­i­ta­tions on the num­ber of den­tal prac­tices owned,” says Im­mel­man. “The abo­li­tion of that reg­u­la­tion saw the emer­gence of large cor­po­rate groups buy­ing den­tal prac­tices, the two largest be­ing In­te­grated Den­tal Hold­ings (IDH) and Oa­sis.” The cor­po­rate den­tal op­er­a­tors – den­tal prac­tices be­ing their pri­mary busi­ness – are not par­tic­u­larly in­ter­ested in own­ing the prop­er­ties or be­com­ing land­lords. But hav­ing ac­quired the den­tal prac­tice of­ten re­quires ac­quir­ing the property, which they then rent out to the den­tal prac­tice.

And this is when th­ese prop­er­ties, dot­ted around UK vil­lages, with their AAA grade cor­po­rate ten­ants who have signed long leases, be­come avail­able for pur­chase.

An at­trac­tive in­vest­ment op­por­tu­nity

Part­ner­ing with SIRE Prop­er­ties, a UK-based in­vest­ment com­pany that spe­cialises in find­ing and

Den­tists rep­re­sent one of the low­est de­fault risks, thus offering a low-risk ten­ant pro­file and very low va­cancy risk. “With a 20-year signed lease in place and the busi­ness rights of the prac­tice sit­ting with the build­ing, not the den­tist, you can gear 50% with­out even be­ing asked for fi­nan­cials.”

man­ag­ing niche property op­por­tu­ni­ties, Pam Gold­ing Prop­er­ties says the offering of af­ford­able lot sizes of den­tal property rep­re­sents se­cure, pre­dictable longterm in­come as well as cap­i­tal growth prospects.

As a land­lord to cor­po­rate den­tal ten­ants, a large pro­por­tion of in­come is guar­an­teed from the gov­ern­ment through the Na­tional Health Ser­vice (NHS). And den­tists rep­re­sent one of the low­est de­fault risks, thus offering a low-risk ten­ant pro­file and very low va­cancy risk. “With a 20-year signed lease in place and the busi­ness rights of the prac­tice sit­ting with the build­ing, not the den­tist, you can gear 50% with­out even be­ing asked for fi­nan­cials,” ex­plains Im­mel­man.

Typ­i­cally in the £200 000 to £450 000 (R4.4m to R9.8m) price range, den­tal prop­er­ties are nor­mally for­mer res­i­den­tial units, af­ford­ing in­vestors a safety net via al­ter­na­tive use value and exit flex­i­bil­ity with a po­ten­tial buy-and-sell-back op­tion through SIRE Prop­er­ties.

“The sweet spot for South Africans is £350 000 (R7.6m). They can’t spend £600 000. Here they own the build­ing en­tirely, have a cor­po­rate AAA ten­ant who looks af­ter the build­ing and have three dif­fer­ent val­u­a­tions – one with the cor­po­rate ten­ants in place, one with an al­ter­na­tive ten­ant other than a cor­po­rate ten­ant, and vi­tally im­por­tant, the property’s worth as a res­i­den­tial home. If all else fails, it has a res­i­den­tial value and of­ten that value on day one is higher than that paid for the property. So the un­der­pin­ning is all there,” says Im­mel­man.

And, it seems, den­tal property in­vest­ment comes with no un­ex­pected costs. “Leases are nor­mally 15- to 20-year fully in­sur­ing and re­pair­ing leases. The land­lord pays for noth­ing. Not for in­sur­ance, paint­ing the build­ing out­side or fix­ing the roof. And it has to be kept in pris­tine con­di­tion be­cause den­tal prac­tices are all NHS reg­u­lated. From day one you get be­tween a 6% and 8% yield, bet­ter than a res­i­den­tial yield, and good in­come for the next 20 years,” says Im­mel­man. “Rental es­ca­lates ac­cord­ing to in­fla­tion, an in­fla­tion study done ev­ery five years. If in­fla­tion goes up, rentals can be in­creased but never de­creased.”

Un­der­stand­ably Im­mel­man is upbeat about trac­tion in the den­tal property mar­ket con­firm­ing that 10 units, a value of ap­prox­i­mately £6m (R130.7m), have al­ready sold to South African in­vestors.

“If I can bring 100 of th­ese prop­er­ties to mar­ket, I know that a cor­po­rate here in South Africa, prob­a­bly one of the listed funds, will take them. Be­cause it gen­er­ates in­come, all the time. And they can gear off that,” con­cludes Im­mel­man.

Chris Im­mel­man MD of Pam Gold­ing Prop­er­ties In­ter­na­tional

and Projects Di­vi­sion

Vin­cent Row apart­ments in Wim­ble­don

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