Auction Infiltrated by First Time Buyers
I went to the auction on Tuesday hoping to grab a one bedroom property in West Kensington. The property had some beautiful features, high ceilings, a balcony good light and large patio doors leading out to the balcony. It was a first floor period conversion seconds away from West Kensington station.
We have done all the figures and seen the comparables, not just from the internet but we had researched the nearby property and spoke to agents too.
We found a similar property was also converted to a 2 bedroom and sold for £388,000 recently. This was an exact replica being a first floor conversion on the same street. This data was not on the land registry as it was yet to be registered due to the recent sale. We got our information from a contact in the area.
Comparables are at times outdated, for example if the sale happened on the 4th Feb 2011, the price would have been negotiated perhaps 2- 3 months before the completion. Since February 2011 to current month October is another 8 months. So the nearest comparable is possibly one year old. Therefore these comparables have limitations, and is dependent on how volatile the market has been during this period. This is why local knowledge is very important.
The property was guided at £260,000. We were hoping to pick it up at £300,000 and make a tidy profit by converting it to a 2 bedroom flat .
The features would put it above other 2 bedroom flats in the area and so we were confident this was a good buy.
At the auction the bidding went well in excess of what we were prepared to pay. It ended up selling for £380,000, which doesn’t make any sense what so ever.
This left me thinking what was going on, because we are not in a booming economy.
The reasons why this property achieved this price are as follows. Firstly people are confident of central locations. There are more people chasing deals in central locations than any other part of the UK. Therefore they purchase with anticipation of a price price rise. Their confidence comes from a combination of past performance and supply being fixed.
During the credit crunch these locations survived extremely well and only increased in price especially at this end of the market.
The reasons for this are these locations are under pinned by foreign demand who see London as a safe haven during troubled economic times. The other reason being you cannot extend in boroughs such as Westminster or in this case Chelsea and Fulham as planning is very strict stemming from a desire to maintain the character of the buildings.
So the only way to add square footage to a property is through basement conversions. And these are expensive to do at around £500per sq ft. A recent example is when we purchased a building in 98 Bravington Rd, Maida Vale a block of 3 one bedroom flats for £726,000. Straight after the auction we were tracked down and offered £750,000 for the property. A couple of weeks later we were again offered £780,000. This was without completing on the property and without even marketing the property!
Property in these locations can be compared to a scarce commodity like gold. With recent bank bail outs which means more pieces off paper have been dumped in the economy. This simply means more paper will be required to purchase property. Property and land is finite, it doesn’t increase, money is printed at a whim and backed by nothing tangible.
So simply looking at it if you have something scarce and finite and something else which there is a seemingly endless supply of, the scare commodity will always hold its value medium to long term. The other reason why the property went for so high in the auction is there are two types of buyers of property, one is the investor and the other is the end user.
Traditionally auction houses were the realm of the investor, and the end user dared not venture into their domain. Now there is the power of Tele visual programming the idea of purchasing your property in an auction has been normalized. Programs like Homes under the Hammer of which there are two programs a day being aired, has now made it normal for the someone looking for a new home to purchase in auction. Interestingly playing poker was not a common activity and about a decade ago it would be seen as what it is which is gambling and sinful by most religions. With television airing so much Poker it has become a normal leisure activity.
If you have two of these unwanted end users in an auction the margin in a property soon disappears.
The purpose of these buyers is not a financial one but an emotional one. Properties which have fine features in strong locations, soon get spotted and investors are priced out of the purchase.
At times it seems almost a reverse process is happening, properties are achieving more at auction than through agents. The reason being when emotions are involved people do not consider the price. An auction is the ideal forum to excite these emotions.
Sow & Reap
A Property Investment & Financing company.