A ‘Convenient Flat’

I visited an interesting property this week which got me thinking about exit strategies.

The property I saw is derelict but had previously been a shop with a flat above it. The shop had been a convenience / general store but was standing vacant and in quite poor condition after years of being neglected. But the savvy new buyer recognised that the area had good prospects and investing in this deal gave him a number of options for redevelopment:

  1. He could convert the downstairs shop back into residential use and create a unit with 2 self-contained flats (one on the first floor and one on the ground floor)2. He could keep the downstairs as a commercial property and redevelop the upstairs into a flat. The property has existing A1 usage which means that currently it can be used for general retail. As the shop had previously been a convenience store, this could be re-developed and opened again serving the same purpose. In this scenario, our buyer would have to be clear about what goods he could sell from the property.

  1. He could apply to the planning dept for ‘Change of Use’ from A1 to another category if he had another usage for the shop in mind. For example, if he wanted to open the shop up as a café selling food and beverages prepared on the premises, then he would need to apply for A3 usage since this kind of activity is not permitted under A1 usage.

So, lots to think about.. and before deciding on his strategy, our buyer would have been well advised to carry out some thorough research. The sorts of questions he should be asking are along the following lines:

Option 1

What would be the resale opportunities of the 2 x flats scenario? Is this predominantly a residential area or is the unit surrounded by other shops with flats above? In the latter case, despite taking this property back to being solely residential, the noise, smell and disruption usually associated with living in an area surrounded by shop units, could put potential buyers off.

Option 2

Even in the second scenario, where the downstairs commercial unit is retained, our developer will need to be mindful that living above a shop is not everyone’s cup of tea. It could put off prospective tenants and if there is already an oversupply of rented property in the area, our investor may find that he has to do more to allure prospective tenants. The same would apply to buyers. That said, due to rising house prices, first time buyers have, in more recent years, happily considered this set up since flats that are above shops can go for anything up to 15-20% below other comparable properties that don’t have a shop beneath them. Buyers wanting to get more property for their money may consider this as a way of either managing to buy in a more preferred location or getting a flat that is larger than what they might otherwise afford.

Put yourself in the end buyers or renter’s shoes for a minute and the factors they are likely to want to know about are:

– What is the nature of the business being carried out in the shop below? Some shops will come with certain noises and smells simply because of the nature of their work but they may not necessarily all be ‘bad’ i.e., consider the aroma of a dry-cleaning shop versus a bakery.

– Does the business mean lots of foot traffic and what are the shop trading hours and how is this going to impact on them? E.g., A general store or newsagent that opens from 6.a.m until 10p.m. 7 days a week is going to have a greater impact by way of traffic and noise etc than say a gift shop selling small gifts and cards that opens from 10a.m to 5p.m. every day but closes on Sundays and Mondays.

– Will the shop need to take in deliveries on a regular basis and when are they likely to happen? Heavy lorries making deliveries in the early hours can be disturbing.

– Are there ‘ethical’ considerations? Whilst a betting shop might not be too detrimental in terms of noise and pollution, some buyers may not agree with the principles of the business.

Of course, if our contributor intends to retain the freehold of the property and lease the shop to another business, then he will also be mindful of the likelihood of success of this business as a tenant!!

Aside from wanting to know about the shop’s business itself, prospective buyers of the flat above will also want to know if they can still qualify for a mortgage on the same terms as a more conventional flat. Flats above shops are often deemed to fall into the category of ‘Non-Standard Mortgages’.

Remember that lenders always want to be sure that if for any reason they are forced to repossess the property, they are able to sell it to repay the outstanding mortgage debt quickly and flats above shops may have certain issues to overcome as outlined above.

It shouldn’t be too much of a problem getting a loan for a flat above any general retail store or professional or financial services company, such as a bank or estate agent especially if it has a long lease, making it easier to sell on in the future. However, borrowers will struggle to find a loan for any home where there is a higher than usual risk of fire or damage. And some lenders will shy away from flats above takeaways, restaurants or pubs.

The easiest way to find out if the property is eligible and which lenders will consider it, is to go through a mortgage broker. There are specialist lenders who are extremely flexible on the type of property they will lend on although this can sometimes come at a price with less competitive deals.

Option 3

These factors will also apply to the last option of applying for ‘Change of Use’. What is the demand for shops in the area? Developing the commercial element to this property brings with it some insight not just into the property market and conditions but also some business acumen. What is the ‘competition’ in the area? If he chooses to retain the shop as A1 usage and re-open as a convenience store, then are there other similar facilities nearby. How would he win customers? Similarly, if he wanted to change the use, he would similarly need to research the commercial viability of the business in the area.

Whatever option this buyer chooses to take, if he/she does their research well, they can choose the best option for them. What I love about this story though is that there are choices available and highlights the point that having multiple exit strategies out of a deal is always a good thing!