Half Knowledge is a Dangerous Thing
In a recent trip to St Georges Hill, Surrey, to look at a deal we have been involved in, I was introduced to a local investor who has been prolific in the area and had been one of the biggest property dealers in this location. He had suffered in the down turn, by being over exposed and more crucially by giving a personal guarantee on one of the properties he was involved with, with one of the banks he had been involved with.
The area is not one I know intimately, but I have heard of it. The little I know of it is that it’s mostly a patch where Russians and footballers live; it is seen to be the place to live, as it is the last place before you hit open country and the town is one of the most leafiest in Britain.
A few years ago we arranged the funding on a property here for a former politician from the former Soviet Union. The mortgage wasn’t easy as he was classed as a PEP, meaning a Politically Exposed Person. Most banks did not want to lend to him because number one he used to be a politician and secondly he was from what was deemed as a highrisk country.
The last thing any lender would want is their name in a newspaper headline where it says a property has been funded by the bank and the money used was laundered; therefore many banks have the policy of not lending at all to a PEP. This means politicians who are not purchasing property with laundered money and can show that their funds are legitimate are left out in the cold. Not all lenders fortunately take this view and some were prepared to do the due diligence required in order to fund this case.
Our client purchased a property in St Georges Hill for £3.9m in 2010 spent £500k on it and is now selling it to someone for £7.5m. Although I don’t know the area well, one thing I do know is that these are impressive numbers; clearly this is an area which rises in sync with the prime parts of Central London.
However it should be noted that the property was purchased cheaper than market value as it was repossessed by a bank. Apart from the impressive numbers this is an area I don’t know, cannot pretend to know and has different dynamics controlling it.
Our dealer in Surrey happened to know about this property, and knew of the details quite well and even knew the previous owner (prior to our client) who was also a Russian. I used this as a bone to test him with, and he came back with the right information.
There are some principles which are the same, as it is property we are talking about after all. But what level of demand exists and which segment of the market this comes from is important to understand. For example, if the majority of the money for these properties came from Russia then the value of the property is highly dependent upon currency exchange rate fluctuations. If it’s a school nearby that is encouraging the values, then what happens if the school relocates?
The Central London market is a very different market to the rest of the UK property market; a recent Knight Frank survey points to a two-tier market, Central London and the rest of the UK.
Researching these locations is not always so easy, so the internet is of limited use. Many properties, including the property we had funded, were not purchased in an individual name, for example the property we arranged the funding for was purchased through a company which was wrapped in a trust.
When these properties are sold it will be done by way of a share transfer, this means you will not see from the Land Registry that the property has been sold. The companies may not even be based in the UK; which adds a further layer to the transaction.
When looking at some brochures of property in the area I casually pointed out a modern newly built home and remarked to the dealer that this looks very good; the inside was superb and the outside was very modern and sharp. He told me straight away this property was designed by a German who put his German efficiency stamp on the property; it wasn’t in keeping with the area and has been on the market for over a year. So the only person who seemed to appreciate the house was the German who had built it (and me). I obviously did not know what is a good house here.
This means to know an area properly you need an insider who knows the patch to provide information on the real driving forces on the area. In any business you have the external appearance and the inner dynamics, what the sea looks like on the surface may be very different to the currents which go on underneath. The same is with the economy, the superficial information you get from the main stream media and what’s really driving the economy is staggeringly different. The same goes for property.
It is these undercurrents that are important, not what’s happening on the surface. If you dive in just from looking at the surface you might drown.
At times some would be investors like to impart to you their words of wisdom as to why you shouldn’t go for a deal. A few years ago we had sourced a flat for £275,000, this was a three-bedroom duplex ex council property in Westbourne Grove receiving £820pw in rental income, a real cash cow; I introduced this to a client who was based in Sussex, and ran a drink business from there, he liked the figures and so agreed to have a look at the property just from the outside as he only had time on the weekends. He drove down and looked at the property and then reported back to me and stated the property was ugly.
I told him he wasn’t going to be living there therefore it being ugly was irrelevant. Coming from a country town in Sussex where houses have character and individuality an ex council property in a block in London obviously will seem ugly.
What you really should be focusing on are the figures. This was a £42,000 pa producing property; when you take into account mortgage, service charge and management fees you’re left with a £27,000 income on a £70,000 deposit. A few years of this and you will have your deposit money back. I shared my view with him, but he stuck to his guns and so we moved on. The property was sold to a veteran property investor who purchased it blind, based solely on the cash flow. He still owns the property, the rental has dropped to £500pw (because of the new government policy) which is still a good yield of 9.4%.
The challenge we have is many investors come with preconceived ideas, there are two ways this can go, either they suspend these and give us the decision making power, or they enforce these ideas in making a decision in an area which they are not familiar with. They have one saving grace in that the area is going up in general anyway so they will benefit from this natural buoyancy in demand. But they are likely to miss the real cream as they hold on to their own ideas of what is a good property investment, based on previous experience in another location, or what someone else has told them.
In order to master any field of activity there is a need for real guidance from someone who has walked this path, and who knows the nuts and bolts of the industry. You can save a lot of time and money by jumping on someone else’s back!
Ealing, London, W5
Purchase Price: £835,000
- A double fronted semi detached house with potential to extend
- Four bedrooms
- Integral garage
- End value after works expected to be £1.5m
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Sow & Reap
A Property Investment Company
!Tips of the Week
In the current environment take care of your wealth and your health, the state will not do this for you!
Property is not as illiquid as many think; potentially it can be sold quickly through an auction and possibly for more money, don’t forget you can always refinance as well.