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Dilemmas of Developing

Recently we managed to get planning for three flats above a Pub in Kensington. Two floors were already existing above the Pub, the third had been applied for. In order to apply for planning we went for a pre application meeting to sound out the appetite from the council regarding the extra floor.

Everything went well at the meeting and therefore as anticipated planning was granted. It doesn’t always move so easy though as we have been to pre app meetings where the council on the surface were favorable yet when it came to putting things in writing they did a 180 degree U turn on everything they had said.

Now the planning is in place the question arises of whether we                                                                                                                       actually want to do the development.

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One option is to resell the property with the benefit of planning in place. This is the most amount of profit you can make in comparison to the amount of work put in, planning is essentially only paperwork; you haven’t got your hands dirty. Yet it attracts a strong premium, the property will attract bids of £1.85m to £2m even though it was only purchased for £1.25m around six months ago.

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Though this seems an attractive option, as the process has gone on we have come to understand the property better and better. There is further potential to convert the ground and lower ground floor which are being used currently as a Pub into residential as well.

This will not however be easy as the council has a policy of retaining existing Pubs as it classes them as places for the benefit of the community. We would need to demonstrate we have tried to look for a tenant for 12 months clear before they will consider change of use on these floors. Given the current tenant hasn’t been paying his rent and will be vacating end of July this is no doubt helpful to the cause. The Pub is a stone throw away from other similar Pubs therefore the actual use of this Pub in practice is unlikely.

It is best to apply for planning in bite sizes thereby not overwhelming the planning officers. Once they grant one section they cannot revoke it, therefore it lays a good foundation from which to apply for more planning.

This is a policy we will be applying to our recent acquisition of four office buildings in Bell St W2, where we purchased with the benefit of planning and will be applying to enhance the current planning to try and obtain 2,000 sq ft per building.

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Given resales are £875k per flat it is very lucrative to have a freehold building with three if not five flats in there, giving an expected value of £2.625m to £4.375m.

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However, there is a down side as always: Firstly given the council’s stance you may never get the enhanced planning of 5 flats, at best it may take several years to do so. Secondly you’re exposed to the market; this means if things take a down turn you are in the middle of a project and this may mean you cannot resell at the anticipated level, this can of course work both ways and the price can rise too. Thirdly, building work can get messy and lead to unexpected expenses and unforeseen delays.

Applying for further planning does not need to delay implementing the current permission which has been recently given. The two can go on simultaneously, both the build work and application for enhanced planning. This would be the wise way to move forward.

Assuming we can sell for £1.85m the gain would be approx £600k; to make the next £600k – £800k will be disproportionally harder and longer, therefore if you can do the same again it makes sense to sell and replicate the deal.

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However property deals are like buses, they don’t come for ages and when they do they come two at a time; so there is no guarantee there will be a deal on the table to roll over into straight away.

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Given the property was purchased in cash the option for refinancing the deal based on the enhanced value exists, this means most, if not all, of the initial money can be extracted from the deal and used to move forward on to another deal.

Here’s a good tip, you don’t need to draw the funds down straight away when remortgaging a property, the mortgage offer is valid from three to six months, which means you can draw the money down anytime during this period. This will allow you to purchase at auction with confidence, and the money is drawn only when you have found a deal, otherwise not.

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So in this case we could apply for financing for £1.25m based on a valuation of £1.85m and then we have £1.25m in cash to use on another deal whilst keeping hold of the current one. There are lenders who will loan 100% of the build cost; once the flats are developed you can refinance them individually by splitting the lease on conventional BTL mortgages.

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Following this scenario means we allow the property to do what it does best – go up naturally, and this particular area is a hot spot of growth within an already growing market.

Selling this property given the location will be relatively easy as it is an ideal auction lot, and I would imagine it could go for more than anticipated, given the current appetite for buying at auctions.

One strategy is to do several things and see which one yields the most cash: Dump in auction with a high reserve, though many auctioneers, especially the larger ones, will not take it unless they KNOW they can sell it; secondly get the refinancing in place; and thirdly apply for the enhanced planning.

This means you are allowing the market forces at the time to decide on what to do. Always better as a principle to start from inside out and see what is it you wish to achieve, in short to asset build or cash build? Or perhaps both? All said and done these are good dilemmas to have and means there is some movement in your life financially.

The Real Deal

Earls Court, London, SW5

Purchase Price: £1.75m

  • Top floor flat on a highly sought after garden square in Earls Court
  • Three bedrooms, two reception rooms and two baths
  • Long lease of 125 years
  • Access to the 1.15 acre communal gardens
  • The property is coming at £1,300 per sq ft while properties in this location are being sold at around £1,600 per sq ft, it’s rare to     get this level of discount in this location
  • The property will benefit greatly from the Earls Court regeneration scheme, being located close to the proposed ‘High Street’         and parks

Call us now to secure this deal!

Suresh Vagjiani

Sow & Reap 

A Property Investment Company

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!Tips of the Week

Beware when purchasing in auctions, they can be used by many traders as a dumping ground. Check who the seller is and do full due diligence prior to bidding.

Don’t get carried away with buying BMV properties; remember to see what’s happening in the future too.

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