It’s Lonely At The Top

This week we exchanged on a couple of small properties in little Venice and Queens way. Prices were £235,000 and £230,000.

This week we  exchanged  on  a  couple  of  small  properties  in  little Venice and Queens way. Prices were £235,000 and £230,000. In lit- tle Venice we  picked  up  a  one  bedroom  flat,  it  requires  complete refurbishment which will cost £7,000, roughly bringing the price to £265k. The property  is  large  and  spacious,  it has  the potential  to switch  into a  two bedroom and gain  the benefit of a higher  rental yield. This would however destroy the  look and feel of the property. Our client does not require an income and the property has been purchased  more  for  his  next  generation.  It’s Lonely At The Top imageTherefore  we  took  the decision to keep the integrity of the property with the aim of gaining  capital  growth  instead  of  the  enhanced  rental. The  other  is  a studio  in Queensway purchased cheaply, again  it requires an  inexpensive refurbishment and will be rented almost instantly.

There is a current acute lack of stock on the market for a couple of main reasons. Firstly investors on tracker and variable rates are paying  the  lowest  rates  they  are  every  likely  to  pay,  this  is  compounded  with  the  new  stringent  criteria  for  buyers  ,  preventing them  from  jumping  on  the  property  ladder  therefore  fuelling  the rental market. Rents have risen as much as 50% over the  last couple  of  years  thus  further  reducing  the  need  to  sell,  especially  for those riding on the wave of cheap interest.

Certainly  the  lenders  never  envisaged  this  scenario.  This  one was way  outside  of  all  the modelling  done  for  the  products. One basic assumption used when forecasting and modelling is using the past to predict the future. The flaw is if a scenario occurs which has never occurred ever before historically.

This  is one  such  scenario. This  is why  there are  investors currently  paying  negative  interest  rate  such  those  on  the  product priced  0.69  %  below  base  rate.  Currently  this  would  be  – 0.19%.which  means  the  lender  should  be  paying  the  borrower! However a clause giving a minimum payment stops this.

On the commercial side many banks want to be rid these kind of loans. First the lending is too cheap, secondly many of these loans, although the payments are being kept up, breech the  loan to value criteria.

We have recently put a couple of offers on properties at full asking  price.  They  were  not  accepted  because  someone  had  put  in higher offers. One was a three bedroom flat close to Hyde Park for £760k,  another  offer  had  come  for  £785k,  £25k  above  the  asking price. There was also a very nice studio  for £200k which went  for £290k!

This  illustrates  the  robustness  of  the  Central  London  market where even  in a sluggish property market properties are  flying out at above market values.

One of the main angles we were bringing to our investors’ attention  was  the  yields  generated  by  ex  local  properties  in  central London. For a three bedroom property costing around £350,000 the rental would  be  a massive  £800  pw. A  £43,000  per  annum  rental income. With  £100,000  in  and  £250,000  borrowed  the  mortgage payments would only be 12,500. We have done this example numerous  times,  in  short  it would  bring  a  solid  income. For  those who bought  into  this at  the  right  time will enjoy a  strong yield  for  the duration of the contract.

Our original angle, still is a good one with two bedroom ex local flats  the  rental  would  still  currently  be  in  the  region  of  £450pw. This would yield over 7% on a flat worth £300,000. An above average rental yield, but the profit is not in this.  It’s in the location of the properties.

The  above  concept  although  very  good  is  not  the  best  return which can be gained in Central London (now that the housing benefit has been reduced). We have sourced great deals on the smaller end  of  the  scale  and managed  to  flip  them, meaning  done  a  little work and sold them on. These are hard to come by and do not present themselves often.

Many structures are arranged as pyramid, meaning most of  the people are at the bottom. As you get further up there’s less people. You may have heard the expression: it’s lonely at the top. So this is the  same when  it  comes  to  investing  in  property,  there  are more buyers at the bottom end of the scale.

So the challenge is to allow those in the bottom and middle end of the market to get into the higher end deals which yield a higher profit. These also by the same token have a lumpier to sell time line.

In short,  in order  to achieve  this,  the  investor will be purchasing  a portion of  the deal  and will be  in  for  about  a 6  – 12 month period. This will be a tightly structured set up and will be  focused in central London aiming for Properties around the £1m mark.

Suresh Vagjiani

MD Sow & Reap

Suresh Vagjiani
Suresh Vagjiani
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