Currently we are working on a deal on a freehold pub in Fulham which popped up a week ago. I actually vowed to not do any more deals this year, as we have had a frantic year and this is a good period to take stock and do an audit of what’s going on and what we can improve on.
My vow didn’t last very long, it’s like a drunkard suddenly taking a vow not to drink again. It makes sense, but logic doesn’t come into it when there is a more powerful force driving the person which is a compulsive addiction.
So when presented with this deal I couldn’t help but start to track it. The property consists of 6,700 sq. ft., it comes occupied with a commercial tenant paying £150k per annum. The purchase price offered came to £3m, within one week it had risen to £3.1m – so £100,000 is the price of procrastination of just one week on this deal.
Even at £3.1m I have been told there is another party hovering around this property who wants to purchase as a long term hold and the price could rise even further upwards. We have been informed verbally the tenant would be looking to vacate for a fee, this fee has been quoted at £300- £450k. The property has been let out to a large pub group who have in turn sublet it to a smaller tenant.
This means this premises was probably not running well for the larger pub group. I am also aware that smaller pubs are struggling, the pub business isn’t what it once used to be and many of them are looking to jump ship. With a £150k rent plus the council rates who will want their pound of flesh not to mention the other expenses – it will take a lot of pints in order to start making a profit.
Looking at the property it is fairly typical of what a pub is in London. There are four floors starting from the basement. The ground and the basement are used for running the pub and the upper floors are used for residential, the lease is granted to the tenant over the whole building. In actual fact he might only be using the bottom two floors.
There is another way to tackle this situation rather than going straight in and offering a lump sum of money in order for the tenant to vacate the building, and that is to wait for the rent review to come up which in this case will be in a year.
One method is to go straight for the kill, and the other is to lie and wait for the prey to come to you. The approach may be different but the objective is the same. But the latter has the advantage as the prey who is the tenant cannot detect your eagerness to have them out.
You simply increase the rent according to market levels to flush the tenant out, if it’s too much for them you can helpfully suggest a solution which is to occupy only the ground and lower ground floor and leave you free to use the upper two floors as residential flats.
We don’t have any floor plans on the building, on good authority we have heard it’s 6,700 sq. ft., assuming half is residential and pricing it at £1,000 per sq. ft. the price just for the residential flats developed comes to £3.35m.
This means we will roughly get our money back on the residential element alone subject to planning of course, leaving the commercial as your prof it.
The commercial element can remain where it is, the rule of thumb is the value of commercial is priced at roughly 50% of the residential this means it will be valued at £1.675m attracting a rental of £83,750 at 5% yield, which is about right.
This is a simplistic calculation but it contains all the salient points enough to know whether to go ahead with the purchase or not.
There is a further possibility to get another floor on this property, which will mean an extra uplift of £1.5m on it post development, this will be the cherry on the pie.
We purchased a pub deal last year in the area of West Kensington, we managed to get planning for an additional floor on the freehold building we acquired. It was sold without any work being done to the property, with an uplift of £500,000 just on the back of the planning.
This could be a similar scenario, though we are faced with the added complication of the lease, which didn’t really exist on the first deal, when we acquired the first property the tenant was holding over the tenancies.
It is wise to be pessimistic in this situation and assume the lease will never be surrendered. This will mean you have purchased a buy to hold property which will generate a good yield for you much like purchasing a bond will do.
The lease is for 35 years with 25 years yet to run, banks love this kind of tenancy and the funding would be easy on a property with long term secure rental.
Banks take the most pessimistic view and look at who will pay the mortgage if you are unable to or are even dead. Here the covenant is strong enough to honour their commitment and pay the rent well into the end of the lease, and this is a long lease, this makes them comfortable, and when they’re comfortable they are one step closer to giving the loan.
We do not have the luxury of approaching the bank prior to agreeing the deal, we will need to take a view and go ahead and exchange. Agreeing a long completion will give us enough breathing space to agree a loan. The banks are not known for their speed and deals can take over three months, we are in the midst of completing a refinance with a high street bank and even from the time the loan has been sanctioned the due diligence and procedures have taken a further two months!
Therefore it would be prudent in this scenario to also get a bridging facility in place, this can be agreed quickly. This will be your insurance policy, should the bank finance not happen in time; there will be cost involved but this can be seen as your insurance premium.
The Real Deal
New Cavendish St ,W1
Purchase Price: £650k
- A large two bedroom flat in a beautiful block, ultra quite for the location
- Close to Portland Place
- Lease extension cost estimated to be around £1m
- Properties in this location are sold for around £1,800 – £2,000 per sq. ft. while post lease extension this will come at £1,570 per sq. ft.
- Excellent buy and hold opportunity in an area which is still set to rise
Call us now to reserve!
A Property Investment Company
!Tips of the Week
Property is a very forgiving asset class,even if you purchase a dud property given time it will rise; the stronger the location the quicker it will rise.
Decide how you want to make your money – there are properties which produce great yields and those which give massive capital growth. Decide what you require before investing.