Business

Good operators always shine through – Opportunities are available when there are tough trading conditions

by Rebecca Warriner

We are in difficult trading times for the hospitality industry. Following the national (and international) lockdown due to the covid-19 pandemic lifestyle habits have changed. This varies from workers not going into offices, through to regular diners choosing to stay at home rather than be in busy social environments, through to a reduction in those who travel as part of their job and stay overnight in hotels. All of these changes mean a reduction in the available market for many sectors of the hospitality industry.

On the back of these lifestyle changes, and in part because of them, we are in a time of increasing lifestyle costs for individuals, and operating costs for businesses. It would appear the outlook is gloomy for all.

However, in difficult times where businesses fail there are opportunities for those who can identify trends, manage costs, and target those areas where there is the potential for  growth. This is not easy to do and can take up a great deal of time. Many operators in the hospitality industry that try to spread themselves too thinly, or have additional employment to make ends meet, may find that forgetting the planning stages of their business can be mortally wounding. Traditionally the hospitality industry was the sole focus of those involved in the day to day running of a business, but the trend to look at a pub or guest house as a way of topping up on other employment became fashionable in the early 2000’s when property prices and profitability in these sectors rose with the need for little additional input. Focus must now be 100% on making a business a success.

The formula for success in the hospitality industry is not rocket science, but it is pretty close and it needs dedication, thorough and ongoing planning, hard work and long hours. Not putting the work in means reduced turnover, but the costs are still there. These costs are rising so that means less operating profit. 

2023 sees my 37th year in the hospitality business. There have been many peaks and troughs for the industry during that time since 1985. However, one constant has remained. Operators who understand trends, control the gross profit and costs in their business, and plan ahead, continue to have a successful business. There is always something to do. Plan when it is quiet and make hay when the sun shines.

At MJD HUGHES Ltd we are always talking to property owners and landlords who have opportunities for those who can operate a business. Our job is putting the two sides together. Our business is the hospitality business, and keeping it going. We don’t believe that good businesses should close. Email us today at info@mjdhughes.com if you are interested in running a pub, guest house, restaurant, hotel or have an idea for a property that may just be ahead of the game. We would love to hear from you and marry you up with the property that will help you realise your potential.

Update on Business Rates

by lhartzenberg

The 2017 rating list cycle is due to close on 1 April 2023. The Valuation Office Agency (VOA) the government department that calculate business rate valuations operate a system called check-challenge-appeal that business rates payers must use if they dispute the valuation on their property. The cut off for any checks to the existing business rates valuation must be submitted by 31st March 2023.

The uniform business rate multiplier for next year is expected to exceed its current level of 52p in the pound so even if your current valuation remains the same the cost of your business rates bill will increase.

Business rate payments could rise higher than they should be if values are not checked before the cut off date. This will damage many businesses at a time when all costs are rising. One report has quoted retail rents drop by 17.6% since their peak in 2018.

It is the responsibility of all business owners to check their rateable values and leaving it to the last minute risks that the Valuation Office will not get through a backlog of checks in time for the deadline. Much of the work undertaken by the VOA will be in compiling 2023 rating list, so checks that are not correctly presented to the VOA could be ignored.  The period since the last revaluation has seen some very difficult trading times with many commercial property sectors showing a decline in rental values and a notable lack of transactions.

If you feel that you need to check your business rates valuation, go to the government website:

https://www.gov.uk/find-business-rates

Need help to organise a ‘check’

If you want help organising a ‘check’ with the Valuations Office Agency (VOA) contact us today at info@mjdhughes.com

Before we can help you we will need the following information:

  • Name and full address of the property including postcode.
  • If it is an office or other unit within a shared property, then details of the main property.
  • Full details of any lease on a property but as a minimum, the name of the tenant and the name of the landlord as they appear on the lease, the actual area of property the lease relates to, the start date, end date, next rent review date, and current rent.
  • Your full contact details, so that we can contact you with initial questions to assess whether there is ground for a check or challenge, or if a full revaluation is needed.

Without any of the above it will be impossible for us to find the correct information for you. In many cases there are no grounds for changes in the business rates valuation and it is better to confirm this with clients sooner rather than later so as to avoid costly fees.

For more information on business rates go to:

https://mjdhughes.com/business-rates/

Permitted Development Rights explained

by lhartzenberg

Jen Lemen is a co-founder of Property Elite, Chartered Surveyor and RICS APC assessor, she explains Permitted Development Rights, including the new MA class, when this comes into force and the restrictions that are applied.

What are PD rights?

PD rights allow certain types of development to be carried out without full planning consent being granted. This could, for example, facilitate certain changes of use. PD rights are generally limited (by Article 4 directions) in certain areas such as Conservation Areas, National Parks and Areas of Outstanding Natural Beauty (AONB). Where PD rights are available, prior approval is still generally required which allows the Local Planning Authority to consider the proposals, impacts and mitigation measures in relation to factors such as transport, parking, flooding, contamination and noise.

What does MA stand for?

MA stands for Mercantile to Abode. Class MA is, therefore, a PD right set out under the General Permitted Development Order (GDPO).

When does the new Class MA PD right apply from?

1 August 2021.

What is the new MA PD right?

Class MA creates a PD right from Use Class E to Use Class C3 Residential. This will essentially help to increase the supply of housing by revitalising redundant commercial stock (commonly located in high street locations).

What is Use Class E?

Use Class E encompasses retail shops, cafes, restaurants, financial & professional services, indoor sport and fitness, medical or health services, creches, day nurseries, day centres, offices, research & development and light industry.

Are there any restrictions on the Class MA PD right?

Yes, these include:

  • The requirement to apply for prior approval
  • The Use Class E building must have been vacant for a continuous period of at least 3 months prior to the application for prior approval (i.e., no tenants in occupation for this period)
  • The Use Class E building must have been in this use for a continuous period of at least 2 years prior to the application for prior approval
  • The cumulative floorspace of the building must be less than 1,500 sq m
  • The building and site cannot be part of a Site of Special Scientific Interest (SSSI), be listed, a scheduled monument, a safety hazard area or a military explosives area
  • The building cannot be within an AONB or within other site-specific designations

Jen can be contacted on jen@property-elite.co.uk The Property Elite website can be reached via this link: RICS APC Training, Support and Coaching | Property Elite

Community Ownership Fund Update

by mjdhughes

The Community Ownership Fund is a UK government  initiative to help communities fund the purchase of properties that benefit the community. Extract from the government website in relation to the Community Ownership Fund. Last updated 14th December 2021

“In order to fully examine, learn and implement the lessons of the first pilot bidding round of the Community Ownership Fund, the Department for Levelling Up, Housing and Communities will be pushing back the start date for the second round to spring 2022. This will enable us to ensure that the Community Ownership Fund is able to effectively invest in communities across the United Kingdom and that communities have more time to submit successful applications to the fund.

We will be launching an updated prospectus, assessment guidance and application form in spring 2022. Alongside this we will also be offering additional support to interested groups to help as many projects as possible to benefit from the fund.

In the meantime, we understand that some community groups who were unsuccessful in round 1 will be seeking to reapply for funding due to urgent time constraints related to saving their community asset. We will therefore be reopening round 1 only for those applicants whose bids were eligible but were not funded in the first bidding round on 6 December 2021 and closing in February 2022. The assessment criteria and prospectus will remain the same as round 1, and we are therefore only looking for markedly improved bids to reapply, otherwise projects will not meet the requirements for funding.

We will be contacting all those who were eligible but unfunded in round one to discuss how we can offer support them going forward.“

Further details can be found at Community Ownership Fund

Cities

Commercial to Resi – Will this trend continue to boom?

by mjdhughes

In this ongoing series, Property Investor Today will explore whether commercial to residential conversions – one of the biggest trends during the pandemic as the high street and offices have suffered more than most – will continue now that life has returned to something closer to normal.
Here, in part 1, we check in with two experts in their field for their thoughts on why the trend has emerged and how much legs it has moving forward.

Mike Hughes, Propertymark Commercial Chair

Commercial to resi has become a major trend – but is it only temporary?

Converting commercial property to residential property has always been a popular option for developers. Many commercial properties are conveniently located and occupy larger plots than existing residential plots. Add to this the car parks for existing retail, restaurants, pubs and other commercial units and this makes a change of use a financially attractive proposition for many developers.

How is commercial property faring now compared to the worst days of the pandemic?

Commercial property has fared better than most agents felt it would suffer throughout the pandemic. Business rate holidays and reductions together with the relaxation of rent costs have helped many operators. Existing owners have seen a reduction in income from lower rent, but this has been the same for all landlords. Property has continued to move, if at a slower rate of sale, but tenancy options have tended to be stagnant. Even this trend has been challenged with many smaller properties being attractive to those people who have looked for a change of direction post-pandemic and started their own business.

Are more commercial to resi conversions inevitable as offices continue to operate at lower or no capacity, and some parts of the high street continue to suffer?

Nothing is inevitable, and less so with development and change of use. The recent amendments to the planning act introduced by the government have not been attractive, and after the recent reshuffle are now on hold. Landlords are appearing to wish to keep existing tenants, even if this means lower rents, rather than test the market by putting properties on the market hoping for quick wins by selling to hungry developers. Many offices are not located in sites attractive to residential occupation (out of town office ‘parks’, etc). There is definitely the possibility for change of use, and maybe this could even be to warehouse storage as e-commerce increases. We are not yet seeing a rush to this, though.

City centre high streets are definitely suffering. Big names are abandoning the large city-centre sites, but agents are advising that market towns and many suburban high streets are flourishing with very little vacant property. Change of use can take a considerable amount of time to confirm with planners. This means that money is tied up for developers unless they have a clear timescale for the development.

Are mixed-used schemes, combining commercial and residential in the same development or project, a better compromise than just straight-up commercial to resi conversions?

This is a solution that would energise many town and city centre streets that have high pension fund ownership. Currently, these pension funds invest in commercial only, making the upper floors of retail units in many established high streets unlettable for residential use. A change to this would mean more inner-city/town living and solve issues relating to housing and bring life to areas after dark.

What are some of the challenges associated with repurposing commercial properties?

Many commercial properties require a complete refurbishment which is costly. For many, it is cheaper to knock down the property and rebuild. This means high development costs and lower profit for developers. Such developments are then unattractive. Added to this, many local communities do not want to see the loss of facilities. Pubs, cinemas, and shops have all seen recent opposition to change of use based upon the loss of the facility. The bottom line for any developer wishing to change the use of a property is that the change makes better economic use of the property or plot. With added costs, for whatever reason, this makes each proposed development a finely balanced decision.

Steve Jacob, CEO of Fabrik Invest

How easy is it to convert commercial premises into residential?

The ease of converting commercial premises really depends on the commercial property. B1 office to residential is a regular use class change, but listed buildings are tough to convert, as are those in conservation areas, as you need certain sign offs. That said, it can still be much quicker to get hold of a commercial building and convert it to residential accommodation than to build from scratch. If the layout is simple, then you can send in a fit-out team to put stud walls and electrics in, which can be a lot quicker and a lot more cost-effective. I’ve done a lot of commercial to residential conversions. I like getting buildings subject to planning and then sometimes flipping the building and sometimes developing the building out. There’s always a lot of potential.

What are the rewards and potential risks?

You can buy some really great assets when you look at commercial properties. For example, I recently bought a bank that I’m going to do up and turn into three apartments. It’s a superb building in a great location – banks tend to be built really well. The reward for me there is that I’ve got a bit of a trophy asset in a good town, with excellent potential. The risk is that it’s in a conservation area, so planning was slow, which meant I had to sit and watch development costs increase while I waited. The potential risk of development is always construction. Construction is risky. You need to find a good contractor and to limit any potential for issues to arise during the construction phase. The main reward is, of course, the financial gain that you can make on the property.

Is converting existing stock more sustainable and eco-friendly than building new homes?

With a new build, you can ensure that all of your materials and your whole supply chain is eco-friendly, as well as the build process, so that’s probably the more sustainable option. That said, there’s a huge amount you can do with conversions to make them more eco-friendly. You can have solar panels, powerwalls, biomass boilers…there are lots of ways in which you can make a conversion eco-friendly.

Are there certain commercial premises that are easier to convert than others – for example offices being easier than a former restaurant or bank?

Certain commercial premises are easier to convert than others. It largely comes down to the shape of the building. You don’t want too many jagged corners or a building in the shape of a hexagon or an octagon! The squarer a building is, the better. A building that’s a funny shape can be a real pain. Much also depends on where the stairwells are in the property. If you can utilise an existing staircase or a lift shaft, that can save you a lot of money. As a developer, the more symmetrical the development is, the lower the cost. If you can use a cookie-cutter template for your apartments, it’s going to cost less than having to deal with different size kitchens, different shape bathrooms and so forth. The more symmetrical the property, the more value you can squeeze out of it and the more you can save on tradespeople’s time.

This trend has exploded since Covid, but is enough support being provided to make it a long-term viable strategy for developers and investors?

I think there’s enough support. The government is trying to make it easier to convert properties, although planning is extremely painful! I think if they stop printing money, it will make it a lot more of a long-term viable strategy, because it will slow down inflation. They need to taper quantitative easing, but then will that create a correction within the market? The thing that’s killing developers at the moment is the constant rise of construction prices. Developers have got to really fight to get these projects through and it’s very hard when your construction prices keep going up. Construction companies keep changing their pricing. Inflation is going to be the biggest killer for developers over the coming years, I would imagine.

What else should developers/investors know?

If you’re doing any kind of commercial to residential conversion, always obtain a ‘subject to planning’ contract. It protects you. I don’t buy things that are unconditional. The only time I’ve ever done that, it’s been frustrating and stressful. I’m a great believer in the commercial to residential strategy. I’ve got plenty of those kinds of deals in the pipeline and now we’re working alongside institutions and funds it’s even more fun than it used to be. Long live commercial to resi conversions!

Kindly Shared by Property Investor Today

Business

With one quarter rent day just gone what looms for commercial landlord and tenant relationships?

by mjdhughes

‘Propertyweek’ the respected journal for property industry has reported that experts are predicting as few as 10% of commercial property tenants will pay their rent this quarter. The article, that subscribers can read in full, actually claims only 10% of rents will be paid. If we look at this another way maybe the prediction is for more tenants paying but only part of their rent? Time will tell. This second possibility would certainly make sense. With businesses hit hard from retail to office, and leisure to industry, paying some rent rather than all will help to pour oil on troubled waters between the historically fractious relationship of landlord and tenant.

Landlords need tenants, and tenants need landlords who will work with them. This is true of the current situation and also for the foreseeable future. Maintaining a cordial relationship can only help both sides in the long run.

The High Street has been on a downward spiral for many years and certainly since the credit crisis of 2008. Leisure and hospitality has fared no better as operators open and fail with concepts that consumers quickly tire of. Both sectors went into the covid-19 crisis with few reserves and rents that were based upon a performance that was impossible to achieve. The size and space in a unit  was used to calculate how many consumers could pass through the doors, and spend per head was the key to maximising the value for the tenant operator and by default the rent that could be paid to the landlord. Space remains key to the sustainability of a business, but with social distancing the value plummets as one consumer can take up 4 square metres. Compare this to 1 square metre and 25% of historical trade levels becomes a reasonable expectation.

A quarter of the turnover of a pre-covid operation sounds bad enough but with furlough and possible redundancy the experience of most customers, savings and overdrafts will have been delved into during the lockdown and expendable income must decrease at the very best for the short term.

Propertyweek spoke to many of the movers and shakers of the property world and has come up with some chilling quotes for our time:

When commenting on the low level of rent collections, Vivienne King, the CEO of Revo commented, “If that is the case, it will have severe implications for property owners, their lenders and ultimately pensioners and savers who rely directly or indirectly on retail property for income. These are unprecedented times, but despite the lockdown measures those businesses that can pay, should pay – and those property owners that can support businesses genuinely in distress, should do so. Whilst reinforcing the contractual obligation, this is what the Government’s Code of Practice expects.”

Robert Hayton at Altus Group thinks that the rent collected by landlords will be as low as 10% of what would be expected, “Occupied retail, leisure and hospitality premises in England have received a business rates holiday during 2020/21 worth £10.13 billion but landlords have largely been overlooked despite being asked to play their part by waiving or deferring rent to help their tenants survive. It is only fair that there is tax parity and that the rates holiday is extended to those properties vacant and to let.”

The importance of landlords and tenants working together was commented on by Melanie Leech, chief executive of the British Property Federation, “For any business that is concerned about how it is going to meet its rent obligations, I urge you to refer to the Government’s code of practice for commercial real estate, published on 19 June, as a way to engage with your landlord. Businesses in genuine need of support will find landlords wanting to offer what support they can, and a range of possible options in the code – including flexibility around rents and other lease terms could include moving from quarterly to monthly rent payments and providing rent deferrals or payment holidays, depending on individual business’ financial circumstances.”

No one will be the winner if tenants fail due to rent demands and landlords have to sell due to a sharp decline in  their returns. Some tenants think this is a golden opportunity to buy the property they rent and end throwing money down the drain when they could own the property. This is a naïve way to think as history has shown that this is not the outcome of such circumstances. If landlords find their only option is to sell the property  it will go to the buyer with the biggest and easily accessible source of funding. The result will be that the tenants still need to pay their rent but to another landlord. This new landlord, having bet on a certain level of return will not be as flexible as the existing landlord who can appreciate the tenants business and the relationship of landlord and tenant has already been established.

We should all be careful for what we wish for.