17th Feb 2016
The market is changing, and we are having to change with it, in order to ensure we do not go down a dead end road.
The values at the higher end are softening, we have felt this in particular with a project which was earmarked as a high end house, because that is what the area demands, however we are having to go back to the drawing board to revisit the situation.
It is better to face the reality now than delay the problem or bury it.
The property was purchased as two flats in St John’s Wood, under one freehold title. This was good as it reduced the stamp duty we paid, at the time we tried to put a case in for four flats to reduce the stamp duty even further but our lawyer was not having any of it.
So on the basis of two flats we got a good reduction in stamp duty.
This point of not purchasing one house and instead two flats, has become pivotal in revaluating the deal.
There are rules which allow you to have a maximum of six tenancies as long as you have communal facilities to use, without the need for planning or any further regulation apart from those you would have in place already, such as gas safety.
This dispenses with the need for planning, and also prevents the property from being labelled as a HMO. This is a label which will devalue the property in the future and is a label which will be difficult to peel off at a later date. The reason is the Local Authority like cheap accommodation in the Borough because this allows normal people, like teachers and nurses to live there. Without this type of supply, they would be priced out of the borough.
Having two flats means the above can be implemented in both the separate dwellings, so in this case there would be six units in the flat below and six in the flat above.
You can rent a studio in this location any day of the week, the occupancy rate in prime London is 98.6%. This means whatever the market does, the rent will continue to flow in from this investment.
This in effect gives you some insulation from market conditions.
The alternative was to develop a £4.5m house and wait for the sale to occur. If it didn’t the option of rental is there, however the yield would be terribly low and this would affect refinancing, and it would be difficult to extract money from this. A BTL mortgage is based firstly on rental cover, the loan to value is almost irrelevant when considering BTL properties in London. The rate the capital growth has gone up by the rentals have not been able to keep pace. And BTL mortgages have a rental cover meaning the rent typically has to be 125% of the monthly mortgage amount. So if your mortgage is £1,000 pm the rental needs to be £1,250pm. This is not easily achievable in Central London, we have just finished a development in Bryanstan Square W1 and the rental will be less than 2%. This causes an issue with the amount of money you can borrow. The valuation and the loan to value becomes redundant as the rental cover takes precedent and is the governing factor on how much can be borrowed.
The current mortgage products do not suit the prime spots of the London market. However I have heard there are products out there which allow you to borrow more to compensate for the deficiency in rent, using the same principal a bridging loan works, where all the interest is taken upfront. The issue is when you come to refinance you will be restricted in choice. This is a start but clearly is a long way off from addressing the issue.
Who knows if the rental demand and amounts are strong enough we may keep to this model on a long term basis.
The market evolves and you need to evolve with it, sticking to the original plan of things will cause more pain than moving to its tune.
BTL as a whole is changing. It is no longer necessarily the best way to hold property in one’s personal name when investing in property, in fact it could become a burden to do so from a cash flow perspective.
This does not mean property will become dead as an investment class, this is a difficult scenario to imagine occurring in the UK, rather the rules will change and to invest you will need to move with it.
We will be launching an investment deal which will aim to neutralise the anticipated changes which are due to occur and allow you to invest without paying over the odds in stamp duty.
This will be announced at our seminar on the 25th February 2016 in Wembley, currently we have packaged one deal in this way which ticks all the boxes. We expect the take up to be strong once investors are informed of the issues surrounding holding property on an individual basis. The amount of money this one deal can take up is limited as we only have the one for the moment.
The property has no planning risk, it is producing income from day one. The finance rates will be high street rates, it’s a plain vanilla deal which is designed to be held for the long term. The property is within a regeneration area which is anticipated to grow strongly over medium to long term.
There is a possibility for an enhancement in this investment by adding another floor to the block, the deal however is not sold on this basis, and stands strong on its own legs.
If you are interested in attending the seminar call the office to register your place.
!Tips of the Week
Pooling funds with other investors not only spreads risk – it also boosts your buying power, opening up opportunities to own a share in a trophy asset with a relatively small outlay.
A property crash is not like a stock market crash, you cannot lose all your money as the property is tangible, it doesn’t disappear.