Letting vacant property and retaining existing occupiers are the twin challenges most investors are facing in the current market, according to Livingston Gunn’s third annual survey of Thames Valley-based commercial property investors.

One active section of the market is the private property company and private investor who is buying property let on long leases to strong tenants.

These buyers are attracted by the higher income returns than they would from their bank. Many investors have completed one or two transactions, and most of the activity is in the smaller lot sizes of up to £5m.

Much of the activity has been for properties let on a long lease to a good covenant.

The importance of lease length was clearly demonstrated in a recent deal. An industrial unit in Standlake was offered with Pizza Express on an unexpired term of five years.

The property was acquired by the tenant and a new 20-lease granted. The investment was resold, enabling Pizza Express to make a profit of about £400,000.

The returns on a yield and covenant deal appear attractive when compared with the meagre interest given by the banks.

But care must be taken. Some of the deals are for cash purchasers only, as it would be uneconomic to borrow and, secondly, always ask what the property’s future is.

For example, a property let to one of the major clearing banks in a market town may appear attractive. But at the end of the lease will the bank renew? Who are the alternative occupiers, and how much needs to be spent on the premises to gain a new letting?

There is less activity in the secondary property market where traditionally bank finance plays a key role.

Over the past two years, banks have renegotiated many loans and extended the term in return for higher margins. This has helped the banks, who are seeking to rebuild their capital base.

A number of the banks have a stated intention to reduce their exposure to commercial property, so expect a further round of loan extensions for improved margins until the bank or borrower decides it is time to sell. As a result, there will be opportunities for investors.

Meanwhile, the survey shows most locally-based investors are lowly geared and are well placed to take advantage of the increase in stock during the coming 12-18 months. Many believe there will be fresh opportunities to buy in the next 12 months.

Already there are some investors taking opportunities to make money today.

Earlier in the year, there was strong bidding for a retail and health club investment in High Street, Oxford, close to Carfax.

Ryman’s lease had a year to run on a low rent. With the changing character of High Street there is a pent-up demand from other quality retailers, should Ryman’s not renew. There was strong bidding with the purchaser paying a price reflecting a return of 5.75 per cent a year. Once a new lease is granted to Ryman’s, this is likely to return better than 6.5 per cent.

Where the premises are older, or the occupation leases are shorter, there are fewer investors and the banks are nervous.

It is in this sector that, as the market adjusts, there are excellent opportunities like the Ryman’s deal.

o For a free copy of The Survey of Thames Valley Property Investors contact Robert Gunn on 01865 242888, or see the website www.livingstongunn.co.uk