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Cashing In Your Chips!

Sometime in late 2011 we sourced a three bedroom property in Maida Vale in a purpose built block. The property was a duplex with a share of freehold. Strangely enough although the estate agents thought it was an ex council, further investigation revealed it not to be so.

When purchasing another property previously in the same block our solicitor dug deeper into the history at the request of the lender and discovered this block was made to house council tenants, but at the time there was an over supply hence it was used for private owners. This means strictly speaking it is not an ex council property. The significance of this is huge.

A block at the bottom of Gloucester Terrace W2 known as Gilray House was formally an ex-council property, the majority of the tenants got together and purchased the freehold from the council, as you are allowed to under the legal process called collective enfranchisement, which gives you to the right to club together with other leaseholders to buy the freehold for a fair market price.

______________________________________________________________________________________________________________________________________ The value of the flats in the block doubled over night . Three bedroom properties have sold there for £750,000.

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When you analyse this you will find nothing has changed regarding the property, the uplift comes simply from changing the label of a block. The property construction and the occupants are all still the same.

There exists a stigma which makes ex council property less desirable, sometimes it comes down only to the label given to it. Often you cannot differentiate it from any other block. The reason for the stigma is that ‘ex council’ properties are perceived to be housed by the poorer section of society. This stigma is even institutionalised as lenders also discriminate on this basis, assuming these block are predominantly occupied by immigrants, one parent families etc, however this is no longer the case with Central London properties as the original inhabitants have long ago moved on, though they are still unfairly demonized and consequently achieve a far lower price than equivalent private properties, even though many are better maintained than private blocks.

From a yield point of view they produce a far greater income than private properties due to the low service charges and long lease whilst attracting a similar rental to private properties.

This property was originally sourced for £325,000, which we knew was very cheap for a three bed in this block. The property only required minor cosmetic work costing a couple of thousand pounds and it was promptly let for £450pw to a group of foreign students. Since then the property has always been re-let within a short space of time.

It is our practice to get a valuation done six months after purchase, for the benefit of our buyers. The property was valued at £450,000. To be frank this seemed a little over ambitious, so we valued it slightly lower at £425,000. The date of this valuation was 8th May 2012. Given the property was purchased on 20th January 2012 at 41 Burlington Close W9 this represents a huge uplift given the time. Some clients have stated that the examples given seem to good to be true. Well for the doubting Thomas a land registry search will confirm the purchase price and date, and the property will appear on the Find A Property website with an asking price of £450,000 shortly after the date of this article.

The property was purchased using a mortgage which had a very short penalty term, for only 6 months. Generally products like this mean the arrangement fees are higher as the lender knows you’re likely to redeem the mortgage early so they make sure they get their profits upfront.

As the buyers had come in cheaply the idea was to refinance and take the uplift out so they could replicate the purchase and buy another one. As the property was not producing too much income after the mortgage and service charges had been paid they thought it more fruitful to sell up completely and try to replicate their original success.

The property was bought in partnership between two brother in laws. One worked as a plumber and the other in a civil service job, both on modest salaries. They realised if they did not do anything the time will come when they will not be able to even send their kids to university. So they saw the benefit of investing in something.

______________________________________________________________________________________________________________________________________ By doing nothing people think they are safe, but this is an illusion. If you’re not moving forwards you’ re automatically moving backwards.

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The cost of everything is moving upwards. Simultaneously you’re being stripped of the services the country once used to supply freely such as education and health, so investing wisely and taking ownership of your finances is not an option, it’s a must, even if you wish to just maintain your existing standard of living.

Selling the above property for £420,000 will net them £70,000 after expenses, which gives them £35,000 each. They struggle to save even a fraction of this in a year and they have done next to nothing in terms of effort to earn this amount of money. The property was actually offered to another client first, he viewed it and then went on holiday without making a decision. It was then offered to the existing purchasers, these clients have worked with us previously and have developed trust and confidence in our recommendation. Without looking at the property they purchased it blind on our say so.

The idea behind selling this is to try and replicate the same formula again. Although we have informed them deals like this don’t come in a hurry at levels between £300- £500k in Central London. The chances are they will be investing by grouping their funds with others to get stronger returns by buying properties worth around the £1m mark.

They feel the growth they have made on this property will not replicate itself the following year and so they wish to extract it and try to generate the same level of return through another deal for this coming year.

The property has been put on the market today with an aggressive agent. I’m sure it will start attracting offers this coming month and will achieve close to asking price. Had this property been purchased prior to the government’s reduction on housing benefits it would have attracted rents of £820pw, this would have given the owners an income of £28,000 after all expenses. But this was a honeymoon period, and was never due to last forever. However even after a 2-year period of earning this kind of income you have already made your money, as typically you have got half your deposit back out of the property. Normally a £100,000 would be buried to purchase a property at this price, after two years you would have made £56,000 in net income.

The problem now is many landlords have had it too good and are having withdrawal symptoms. They believe their property should be getting more than the market will pay. The longer they choose to hold on to this outdated view the more money they will be losing. The current rental returns are still very good touching 8% yield which is a solid return.

Coincidentally over the weekend I meet another couple of brother in laws who wanted to invest and they have been looking in Kingsbury and the surrounding areas. They have been looking for six months, over this period they have seen twenty properties and offered on three, however they have been unsuccessful in securing a property.

One of them commented the rates of growth I was talking about sounded ‘too rosy’, these were his exact words. I agreed, the situation IS rosy this is why many people all around the world are investing in Central London.

He was complaining it is difficult to get hold of properties as all the good ones seem to ‘disappear’. The reason for the time taken to get a property was partly down to his indecision, and partly the demand from the brown pound in these areas, which seems to have been unaffected by the credit crunch. The property prices seem almost to be propped up by a combination of Indians and Sri Lankans. The English have long since left this patch.

So I reasoned if these two races are pushing the property prices up in these locations, imagine what’s going on in Central London where the demand comes from 63 different nationalities from all around the world. The price of anything is determined by simple demand and supply. And the supply is further constrained in these regions by the strict planning rules enforced in these boroughs.

The statistics speak for themselves, my suspicion is foreign money is being parked in London not for the growth rates, but for the security against the financial turmoil going on around the world. There are no restrictions to foreigners buying in the capital, the increase in property prices is a by-product not necessarily the aim.

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

The more motivated the seller, the better the price! Anyone moving abroad, getting divorced or going bankrupt will need a quick sale, which is when you will get a good price. Always ask what the reason for the sale is.

The early bird gets the worm! More people lose money from not making a decision than making the wrong decision when it comes to property investment.

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