Penny Wise, Pound Foolish
I have often stated the need to pay good money and get a good law firm when purchasing a property, which is probably one of the most expensive assets you will ever purchase. What was recently made apparent to me was the necessity of having a good planning consultant; and the amount of money one can lose by not having one.
Today we completed on a large property in Madeley Rd, Ealing for £1.48m. It consisted of around 4000 Sq Ft and formerly it was used as a drug rehabilitation centre, but was sold as vacant. The usage currently is not residential, though the chances of getting a change of use to residential on this road are very strong. From a finance point of view this was not ideal as most lenders do not like to lend on commercial properties, they prefer residential as it is easier to realise their security should the loan not be paid; and they do not like to lend on what they term as hope value which means on the potential value subject to planning being granted. This was the case with this property, despite confirmations from planners that planning was only a formality.
In the end we funded this using a bridging loan. Whilst we were going ahead with the completion we had the drawings done, both in the current state and proposed plans. The firm we used was one we have been using for bread and butter stuff like conservatries, loft extensions etc; nothing really too big. Hence I assumed something of this nature would be in their remit. The proposal they came up with looked reasonable at first glance, there were 5 flats squeezed into the building of varying sizes, which would give us a reasonable profit.
However when I spoke to owner of the firm and asked him why he hadn’t considered other options his answer was there was no other way of doing this. I asked whether he had considered adding a basement, his answer was the cost would be prohibitive and no one else had done one on the street. I asked him if he knew what the resales were on the street and if there was any reason why we could not be the first on the street to have one.
His answers were poor; it was obvious he was operating a factory method to planning. There was no real thinking or research behind it .
A basement or lower ground would add another 1000 Sq Ft at least and with resells of £550/Sq Ft it made sense to do this. The cost of a basement conversion would be in the region of £250 per Sq Ft; therefore this makes sense.
Not being satisfied with the attention we were receiving with these planners we decided to get another point of view by bringing another firm of architects in.
This firm was in another league; they could not use the plans the other firm had drawn and insisted they would come and do their own. Their plans didn’t take an hour like the previous firm’s; they spent the whole day measuring up the property. They had also done some research on the street and realised a property down the road had planning for a granny annexe. Needless to say we paid the previous planners for what little they had done and dispensed with them.
In monetary terms a basement would have added at least another 1000 Sq Ft and a granny annexe another 750 Sq Ft at least. So in total with 1750 Sq Ft this valued at £550 per Sq Ft which comes to nearly £1m extra in resell value.
Ok – there is a cost associated with getting this extra space but even if we allow£500,000 for the extra build cost we’re still left with £500,000 profit.
If we had proceeded with the first scheme it would have made the difference of half a million in profit. Their charges were £1,500 as opposed to £6,500. So by spending another £5000 we are gaining £500,000. A 1000% uplift on our extra investment.
The original idea for this property was to simply get the planning and resell it either in auction or privately.
It is one thing to trade properties, where much of the time you’re not even paying much attention to the property other than the bottom line profit and the time taken to get there; but there’s something satisfying in completing a project and seeing it come to fruition.
As we got into the project we discovered the potential with not just the property but also with the area. We are becoming more attached to the idea of keeping it and developing this project right through to completion and perhaps holding it as a long term buy to let.
Further inspection into the area reveals some serious regeneration activity already happening and due to take place in the coming years.
For one, Land Securities have purchased a site in Ealing Common and are looking to develop a £100 million “Film Quarter” complete with a multiplex cinema, film museum and art studios.
Around 80 flats, new cafes, bars and restaurants will also be built in the major redevelopment of the New Broadway site in the centre of Ealing.
Developer Land Securities is behind the scheme which will create new open pedestrian streets and a Cinema Square and a thoroughfare from New Broadway through to Bond Street. The square will have a giant video wall and be available for events and concerts.
This will be happening only a stone throw away from our property on Madeley Rd. There are also two crossrail links coming into Ealing in 2018.
Furthermore property giant British Land took a £142.5 million bet on Crossrail recently as it snapped up a major shopping centre in Ealing. The Ealing Broadway Shopping Centre — home to a host of major retailers including Primark, Marks & Spencer, Tesco, River Island and H&M — is the biggest asset in a £183.8 million portfolio of London properties put up for sale last year by fund manager Wereldhave.
The centre — which attracts 15 million visitors a year and is in a wealthy catchment area of around 1.6 million people — has come up against competition recently from Westfield London in Shepherd’s Bush. But when Crossrail is completed in 2018, Ealing will be just 13 minutes from Heathrow, 19 minutes from Liverpool Street and 26 minutes from Canary Wharf.
So it seems the area will only be coming up in value as time goes on.
When companies such as Land Securities and British Land start coming into the area you need to start taking notice, one simply needs to follow and not think too much.
Both of these have happened in the month of February.
Similar parallels can be drawn to Wembley which has undergone and still is undergoing regeneration. This was pointed out as a spot to invest in in an article I wrote in July 2007. Since then two bedroom flats are now selling for around £350,000 in the new development around the stadium. In the beginning of February this year Brent Town Hall in Wembley was sold to the French Education Property Trust.
Brent Town Hall is a Grade II listed Art Deco building in excess of 90,000 sq ft with a site area of approximately 5.3 acres. It was marketed for sale earlier this year due to its relocation to the new Civic Centre in 2013. This is likely to enhance house prices surrounding the school. The school will serve the French ex pat community settled in the UK; they are struggling to have enough school spaces to send their children too. Most are high net worth individuals who are escaping the high tax regime in France.
The other site for their existing school is in Kensington which has increased property prices in the surrounding vicinity strongly.
So, going back to the need to get good professionals involved, the other important point is at the end of the day very few professionals actually look after your interest; they look after their own and are committed to ensuring they cannot be sued later on down the line. They have no vested interest in whether a deal gets done or not.
The leverage we have over them as a firm is the level of repeat business they will get from us if they do a good job. Unfortunately this seems to be prevalent, it’s a case of following the money.
I find this especially so with lawyers acting for lenders, at times it seems they find all the reasons why a deal shouldn’t happen when it should; we have had deals fall apart with one set of lawyers acting for a lender for the same deal to be agreed by lawyers from another lender.
Sow & Reap
A Property Investment Company
!Tips of the Week
The more desirable features a property has the more it will appeal to tenants and buyers alike, and the more it will increase in price.
Beware when purchasing in auctions, this can be used by many traders as a dumping ground. Check who the seller is and do full due diligence prior to bidding.