Peering into the Future
A property we exchanged upon in Pont Street, Knightsbridge for £1.5m about a month ago has now received an offer of £1.75m. This in a nutshell means from an investment of £150,000 our investor will be making £250,000 in a month.
The property consists of a two bedroom duplex flat, it’s in top condition in a lovely well-kept block; it should be well kept because the service charges are extortionate at £7,000 per annum. I was told it needed about £10k spending on it, but I honestly couldn’t see where you would spend £10k unless you plated all the locks and taps in gold. The property consisted of 1,044 sq. ft., with the benefit of a long lease of 85 years, which we were planning to extend if we ended up completing on the property. The reason being if you extend a lease which is over 80 years you don’t pay any marriage value on it, basically you pay a lot less to increase the lease when it’s over 80 years.
This investor actually doesn’t know that he has received an offer at this level, well hopefully if he reads the Asian Voice religiously he will now realise his flat is now under offer and in the solicitor’s hands and he stands to make a tidy sum from his investment.
The reason why we don’t make a big deal of an offer is because it is only an offer, it doesn’t necessarily mean the deal will be done. Just prior to exchange our investor will of course be informed and ultimately the decision to exchange will be his alone, but I think it’s hard to refuse such a proposal.
There can be certain obstacles in this type of transaction one of them is the funding, most high street lenders do not lend on properties which have been traded within a six month period; and many buyers are blissfully unaware of this issue, many even exchange in the hope of getting a mortgage further down the line before completion. There are many traders who dump their properties into auctions knowing this will be an issue for the incoming purchaser. Many buyers do not know the property they are purchasing is being traded and this is why it is being dumped in the auction, and only after exchanging do they release this deal cannot be funded by a standard high street lender.
Another danger in this type of transaction could be the incoming buyer exchanges but then fails to complete, this means we will have to complete on the deal. If we do not complete we inherit the incoming purchaser’s exchange money and lose our exchange money, so we may be slightly better off, but ultimately we will have lost the deal as we were not in a position to complete the deal.
So these types of deals come with the risks, when doing them we are always prepared to complete the deal if required. In this scenario the mortgage is in the process of being arranged.
The returns are very heavy for the cash invested, the internal rate of return on these figures go through the roof. It is for this reason we are taking a trip to Geneva this week to raise funds with the aim of ramping up what we are doing here. In many ways we will be preaching to the converted, many of these people are property veterans, but this is a different method and there are apparently no funds in the market who specialise in trading properties. Property trading is especially suited to funds because it offers a very high return to the shareholders of the fund, which keeps them locked into the investment, especially if the return can be given in a reasonably consistent basis.
However in order to ensure the capital collected is deployed effectively we would need to change our strategy. Focusing on trading properties is a bit like waiting for a bus, they may not come for many months and then all of a sudden they come two at a time.
It is no way to run a fund. Therefore in order to scale this project up we would need to concentrate on blocks of flats. New builds would suit the model, as you only need to put 10% sometimes 20% and then nothing till completion of the project which can be several years away. This allows you to resell the property prior to completion.
This can be like a double edged sword as if the market falls then you can be forced to complete the deal even though the property is now worth less than what you paid for it a couple of years ago.
Under current conditions this is not something which should be entered into lightly, however the closer you get into Central London the less the problems which effect the rest of the market will affect you. It’s like entering the eye of the storm; when you’re in the middle you’re shielded from the economic woes which face properties in lesser locations.
However in order to scale this up new builds are not the only method to do so, you can purchase blocks of flats which come up from time to time.
Negotiating a long completion with the seller by making the excuse of the due diligence you need to do, or to insisting on getting vacant possession on all of the properties which you know will take close to 6 months, is a good way of extending the completion. During the extended completion you resell the individual properties very very quickly and cash in on your investment.
And if you have to complete the deal you will always benefit from the government’s very kind scheme called Multiple Dwelling Relief, where you will only pay stamp duty on the average price of the property subject to a minimum of 1%. This means if you’re buying 10 properties for a price of £1m you are only eligible to pay 1%. So if you complete the deal the upfront costs are reduced and you can still resell and make a good profit.
Blocks come up from time to time, currently there’s a large bock available in Wembley which has an asking price of £12m for 100 properties of which 40 have been sold off on long leases. This represents a 25% discount on the retail price.
In general existing blocks are safer to purchase as the gains can be realised in a short space of time and doesn’t require much predictive ability. Purchasing off plan means you need to be able to look in to the future and predict what the market will be like in the years to come, this can be a risky business especially when the market is in a state of flux.
The Real Deal
Marylebone, London, W1 Purchase Price: £650k
- A large two bedroom flat in a beautiful block
- Close to Marylebone High Street
- Lease extension cost will be around £1m
- After lease extension this property will cost us around £1,570 per sq. ft., while properties in this location are being sold for around £1,800 – £2,000 per sq. ft.,
- We expect that with a fresh lease the value of this property will be around £2,000 per sq. ft.
- Excellent buy and hold opportunity
Call us now to reserve!
A Property Investment Company
!Tips of the Week
Rather than selling a property and paying capital gains tax; it might be better to extract the increase in value of the property by just remortgaging it.
While investing in a property, most of the money will be invested by the bank not you, remember they will always do a valuation to check their investment is secure, this is an additional check for you, the investor.