We are currently working on a deal in the heart of the London medical district, Harley Street. The property has a commercial element on the ground floor with six residential flats above. The square footage of this big piece of property is nearly 8000 sq ft.
The residential component comes to 6300 sq ft, this portion can be resold at a conservative price of £7.25m. The reason for pricing it low is so we can sell the property very quickly prior to completion.
The commercial element can be sold for £900,000 , which represents a 5% yield on its rental of £45,000. This has been under rented as with the whole building actually. This is often the case when someone has owned the building for decades. They get relaxed and take their finger off the pulse; the managing agents also know that they don’t have to try to hard as it’s an old landlord for whom they have been renting the property for ages. The condition drops and the rent stays the same whilst the market rent increases.
The yield of a property has some affect on the price, especially for clients looking to hold on to a property, and therefore a lower yield has the effect of dampening the price the property should command. This is good for a resell and is therefore good for property traders for whom the yield is almost irrelevant due to the anticipated time period the property is held.
We are looking to not complete on the property but to ‘flip’ it, this means we will be reselling the property prior to completion, so the yield is irrelevant to us.
There are only three points of consideration for us: The purchase price, the sale price and the time period between the two.
The rest is simply noise and irrelevant for our purposes.
The sale price is proportionally related to the time line, meaning the higher price we ask for the longer it will take to achieve, the less we ask for the quicker it will sell. As this is London even if we ask for something ludicrous like say £2,000 per sq ft given enough time, say within a ten years, my belief is it will sell for this price, as the ceiling for London prices is always rising.
We have asked for the property to be vacant on completion; however the aim here is not to have a vacant building. That makes no difference to us really. This is a red herring; the aim of this is that it acts as a delaying tactic to give us as much time as possible between exchange and completion. If we had said we would like to have a long completion it wouldn’t have looked as good as us saying we need vacant completion for legal reasons. The time period between exchange and completion is very valuable to us. Completion on this property would mean we have to come up with 90% of the purchase price, this would be made up from a combination of bank funding and our own funds. So we would have to come up with this along with stamp duty, which in this case would be 7%, which comes to nearly £500,000.
It would be far easier if we took £80,000 off from each flat to ensure they complete quickly prior to completion.
In this situation time literally is money.
Due to the popular location of these properties we are confident of selling them on. To put £1.2m to £1.5m on a property in this location is not a big issue, this is the standard price you would expect to pay in this location. We have an intention to purchase from a couple of clients already without even putting these properties on the open market.
In one way we are buying wholesale, due to the quantity bought, and then selling them as retail individually. This deal requires a £700,000 investment; the potential gain on this deal will be in excess of £1m within a 4-month period.
Of course one should be prepared for the worst. In this case the worst will be we will require 50% of the total funds on the assumption we can get funding for the other 50%. This comes to £3.5m, split amongst two parties this comes to £1.75m.
The investor will need to have £350k immediately with access to another £1.45m after a 4 month period. It is very unlikely you will need the full amount as at the very least a few properties from the block should have been sold, if not all. It is always prudent to prepare for the worst case scenario.
Prime property in Mayfair
- Short lease of 22 years
- Price £1.35m
- Lease extension £900,000 max
- Price post lease extension £2.7m
- Funding is available
- New purchaser will have the right to extend the lease
Sow & Reap
A Property Investment Company
!Tips of the Week
Even when buying a bad property in Central London you are unlikely to go wrong in terms of rentals and resell, apply the same to other parts of London and you might not be so lucky.
You should think about the funding properly when considering a property requiring work, BTL funding may not always work as this is based on a property which is ready to Let.