20th November 2018
We purchased a property on behalf of a client a couple of months ago. The idea was to trade the property on without doing any works to it whatsoever. There were two additions we were going to make to the property. One was to extend the lease, and the other was to purchase the roof space from the landlord. This makes the property accessible to end users, people who purchase to live in, not speculators like us. The reason being, a property with a long lease becomes mortgageable, otherwise only a cash purchaser can purchase.
The property was purchased for £336K, and the idea was to have a quick resell for £450K. This price was set not by us, but by local sales agents. Two agents and two months later the property still hasn’t sold.
This is testimony to the condition of the market, especially considering this property sits at the bottom end of the market. End users, for whom this is probably the biggest purchase of their lives, are concerned if they put money into a property will it decrease by another £25K next month? This is their fear, and this causes paralysis in the market place.
I met an end user who was looking for a freehold house to live in, in Ealing. He reported properties which he was looking at were dropping sometimes at a rate of £50K per month. Therefore, he didn’t know when he should enter the market.
When purchasing to live in, the aim is to buy somewhere which suits one’s life style. Whether you pay slightly over for it won’t matter so much in the long run. However, this is typically not the mindset of an end user.
As we could not resell the property on, we went on to Plan B, which was to get the planning, do the works, refinance and rent the property; and hold on to it. The aim being to extract most, if not all, of the money our client has put into the deal.
The trouble with trying to do a trade in this market is you cannot be certain of the resell-ability. IF it happens that’s great, but you cannot be dependent on it, otherwise you can be caught out.
A model which is bullet proof to the above is one which is not reliant upon the resell values. The only other component in property investment is yield. So, an idea would be to invest in property where they can be developed into HMOs with a strong yield. Yields of anywhere between 6-10% can be achievable, dependent on location. There was a time when a 5% yield in London was the norm, not anymore.
For example, you could look at purchasing freehold houses which can be converted to six bed sits. They can be rented out individually for a higher premium. The property can be refinanced once developed. You then have an asset producing money for you on a monthly basis. Whether the market goes up or down in terms of capital value is irrelevant. Your concern would be the rental yield and occupancy levels, which are far less prone to fluctuations.
Currently, this is one of the strategies we are focusing on for our clients.