26th March 2019
Currently, we are evaluating a very interesting deal in a very central location. It’s a mixed use scheme, part commercial and part residential. This is an extremely rare building to come up on the market; it’s only 150m to a main tube station.
The vendor must have a considerably strong reason to sell as the environment can hardly be described as conducive for selling. However, I have gathered from the sales particulars that it’s not a repossession, otherwise the particulars would usually mention this.
There are a variety of angles which need to be explored in order to maximise this deal. One is a reconfiguration of the existing flat scheme. Second is planning permission for further additional square footage, which in my estimation will add approximately a further 1,000 sq. ft. over two floors. The third is in relation to the commercial element; the angle being to negotiate a longer lease with a higher rent.
This component is crucial, even a small increase in the lease leads to a proportionally greater valuation, valuable for both refinancing or selling. For example, an increase in rent of £5K could potentially lead to an increase of £100,000 on the valuation and a £75,000 increase when refinancing.
Considering the many angles, and given the current environment, one wonders why the owners don’t work the asset themselves.
Perhaps they have bigger fish to fry, or maybe they have to sell for tax reasons. There could be a number of reasons. But there’s a saying, don’t look a gift horse in the mouth. In essence, don’t over analyse a good thing.
We have previously bought a similar deal on Kilburn High Rd, predominately residential, consisting of 23 flats; commercial on the ground floor. Unlike the current deal, the Kilburn one had various issues such as illegal build work being done and enforcement notices. No high street lender would fund this. The block was purchased for £2.675M and resold a couple of years later for £2M more, after it had been worked on.
I see similar profits to be made on this property, although there is no need to go in with a bridging loan. This reduces the pressure on the deal, and allows one to concentrate on working the asset. Things don’t always go to plan, things literally can come out of the woodwork, and as always the market can change; though it’s hard to imagine what can happen to worsen the current instability.
In order to get this at a discounted price, ideally it would be best to execute this quickly and purchase this deal in cash, with a view of extracting at least 50% of the funds further down the line, once planning has been granted.
The yield on this deal at the quoted price is 4.5%. This is an exceptional yield given the prime location. And remember, this is the starting point, the base on which to build on.
The yield will be increased by following the above three angles.
This is an investment which will need to be held for around 2-3 years, with the aim of exiting or refinancing after this time frame.