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It’s Lonely at the Top

With the economy in the state it is in it is perhaps surprising why investors are chasing central London property. Or perhaps the statement should be: because of the state the economy is in people are investing in central London. This is because it is seen as a safe haven given the uncertainty in the economy. Like a precious commodity which will protect your money in times of trouble.

Growth has been predicted to be low for the coming years, but that’s ok because we have a huge economy and a small percentage of a large number is still a large number, or so we have been fed.

Inflation is said to decrease to less than 2% therefore reducing the need to raise interest rates. So interest rates are likely to remain low in the future.

Why then are the petrol prices booming and why is the cost of borrowing still so high?

Petrol prices are linked to oil prices which are measured in dollars and therefore a cheap pound increases the amount we pay for petrol. That’s one reason.

As for borrowing, the mortgage rates have improved to what they were a few years ago but compared to the base rate of 0.5% we are paying well over the odds. This is because there is very little liquidity in the market and not much appetite for risk.

Property prices are still increasing – in Central London. Decent Deals are very difficult to find at the levels below half a million.

One of the main driving forces of the sale of ex-council properties in Westminster was the amount of housing allowance being paid for housing. Currently we are receiving rent of £820 pw for a three bedroom property in Maida Vale purchased for £352,000, a yield of 12% in a prime postcode.

This was a honeymoon period and the time is up as the government has capped the housing benefits. But that’s OK as honeymoons don’t last forever and the money has been already made. A surplus income of £30,000 per annum over 2 years means you have already cashed in.

But in the interim the rentals have been climbing up and so now the difference in price between government housing allowance and private are not that far away, especially for one and two bedroom properties.

For a two bedroom property we have just achieved a guaranteed 3 year rental contract for £430pw. Ok not quite the £550 paid by the housing allowance in its peak but still a decent yield given a purchase price of £320,000 for a two bedroom ex- local property, giving a yield of 6.8% in a prime location. This is despite the general condition of the economy.

These are solid returns, and the growth prospects given the location are strong.

However the real money is in partially completed development deals or large value deals. The reason is banks are very averse to development funding due to diminished appetite for risk and little money to give away, so you are finding solid deals in the market which should not be there.

One example was a building in Mayfair priced a £1,000 per sq ft.This was no’s 4 and 5 Queens St, prime freehold hold buildings seconds away from Green Park station with a combined Square footage at 11,000. These were formally owned by Simon Halabi a Syrian-born businessman formerly based in the United Kingdom who had embarked on a series of speculative property ventures, he amassed a sizeable fortune himself. In the Sunday Times Rich List 2007 he was ranked 14th richest person in Britain, while the Forbes list of global billionaires listed him at 194 in 2007, with an estimated net worth of $4.3billion.

In 2009 Forbes ranked him 224 with a reduced net worth of $2.8billion and he was declared bankrupt in April 2010.

These two buildings had been on the market and came to our attention from someone who knew someone who could get the contracts. These are called runners, they ‘run’ around central London with property deals assuring everyone they have complete control over the deal. In the end they couldn’t even get us access to the buildings. Normally we try and avoid deals which have many links to them as at times it is hard enough to do one deal with the owners direct what to speak of so many weak links in between before you get to the owners. It later transpired all someone was trying to do was to flip the contract, they had secured the price and got the contract which is not an easy thing to do, as with buildings like this you need to show proof of funds in order to secure the contracts.

So we made contact via our lawyers, and using the land registry we tracked down the firm in charge of the sale and then the agent who was selling the property. Luckily our lawyer was a former partner in the firm handling the repossession. It went to closed bids, we were informed the properties went for around the £11m mark – cheap given the location.

The reasons why it went cheaper than it was on the market for was because it had a failed bids and therefore the property loses its sheen when it’s been on the market for a while and had a couple of failed bids, nobody wants an unwanted property, this perception drives the price down. Overriding this is of course the location and the fact it is freehold there is nothing on the market which even matches this building.

The normal price for this building would be £1,500 to £2,000 per sqft depending on the finish. The building had the added advantage of being able to add Sq footage which is a rarity in this location. As the buildings were next to each other there was a real potential of developing lateral flats across the two buildings which would attract a premium in price.

There were in my opinion two reasons why these buildings were cheap, first they required massive development, second they were big, on the high end of the scale.

Therefore turning this on its head in order to get the juiciest deal one needs to go for bigger deals with a development angle to it. If these are the blocks in the market, how can you exploit the situation and have an edge on these types of properties?

Firstly the way to get around investing in higher value properties is to pool many investors together and form a Company or Limited Liability Partnership or something else depending on the best structure. Pooling your investment will allow you to get a portion of the pie which otherwise you will not be able to reach independently. This is part of the reason we Indians stay wealthy, we are networked. The alternative is to go alone which is fine but you will not get the margin one would at the higher end of the scale, unless of course you have access to these kinds of funds. This is especially true of buy and sell opportunities which currently exist in the market.

To get around the second problem of no funding for developments most high street banks are not lending and if they are they will exhaust you with unnecessary paper work and cross guarantees. We have access to lenders which will lend in today’s market on prime developments without too much fuss. In short these guys are new entrants into the market and are hungry for business and will do what they can to get the deal through. To get lending currently is not that easy, with many lenders it’s almost like ‘we do not want your business and we are doing you a favour!’ This pervades the entire criteria and processes when applying for loans. Money laundering has become ridiculous. I do not think most people who deal with money laundering know what they are looking for, they do not know the purpose of the laws, instead they use it as an excuse for more and more paper work.

So if you are a group of friends or colleagues and would like to explore these ideas further give our office a call and we can arrange a meeting. Now is the time to strike!

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment & Financing company.

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