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. 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. Therefore 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.
MD Sow & Reap