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Carving a Deal

10th September 2019

Currently, we are looking at an off-market deal in Fulham.  The analysis should be relatively easy as we have spent a lot of time on a property just around the corner from this freehold, shop and uppers building.

The exit and rental values have already been analysed, although the market has moved since the original deal.  Intelligence from the ground tells me the market is picking up very strongly especially in central locations.  Viewing numbers and offers are up.  We have unfortunately experienced this first hand, when we got gazumped on a two bedroom probate flat in W2, and then the person who gazumped us also got gazumped.

These are not signs of a stagnant market.  From what I can see there is very limited stock on the market, only those who have to sell are selling.  From this pool buyers home in on the diamond deals, so good stock is still commanding high prices.

The building I have been offered has a story behind it.  The property was being developed into an HMO on the uppers, and the commercial below was presumably being tidied up.

The builders went bust and now the property is only half complete and unsecure.  It seems the owners want to sell to simply get shot of the asset.  Presumably they bought the property many decades ago.  It appears they do not have the inclination to complete the build.

The benefit to purchasing a commercial asset is firstly the stamp duty, there is no ridiculous 3% premium to an already high rate. Simply because it has a commercial element to it.

There are a couple of ways to do this deal.  One is the straight forward way, by exchanging and completing shortly after.  You will need to purchase the property either in cash or with a bridge; in its current state it will be very difficult for it to be funded by a High Street lender.

The other, more clever, way of doing this deal is to exchange for a nominal amount and then agree with the vendor to complete the works between exchange and completion.  This means you complete the deal on a finished BTL building, which will be producing income.  This takes all the variables out of the development of this project and is viewed very differently by lenders, and will attract lower rates and be a more stable proposition for them.  Structuring in this way means there is less money tied up in the deal, and possibly none at the point of completion.

Renting out the residential is not an issue in this or any market.  Given the location I expect it will be occupied within a matter of days.  It’s the commercial element which will require careful attention, as this market is going through changes.  One particular company is making it very difficult for retail traders to trade.

Therefore, one needs to adapt to the flow.  The concentration needs to focus on tenants which are technology proof, such as hairdressers, coffee shops etc.

Suresh Vagjiani

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