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Pricing In Risk

17th March 2021

This week I went to see a cluster of commercial properties in East London.  On the face of it the yield appeared very attractive, in addition I was told there was development potential.  It consists of 3 shops and 1 three bedroom flat.  The three bedroom flat has been converted illegally into three flats.

The vendor is looking for offers of £1.5M and is currently receiving a rent roll of £115,800.  This is a very high yield.

To me the road looked like another version of Ealing Road in Wembley, though with a greater ethnic mix to the area.

The property, although having an attractive rent roll, looked maxed out in terms of development.  If someone had the tenacity of converting a 3 bed flat into 3 flats – illegally, it’s doubtful they will have left any meat on the bone for anyone else if they could do anything further legally.

There could be a slight angle if you purchase the property and then sell it off piece by piece, however, all the shops are occupied by separate individuals, so, how does one ascertain what they are worth?  It would be easier if it was a corporate outfit in occupation.

The illegal conversion with the flat upstairs rules out mainstream lending; therefore, in order to fund this you would be looking at a flexible bridger.

We had a similar situation when purchasing a repossessed block of flats in Kilburn, which consisted of 23 flats above a Nandos.  During the conveyancing we discovered that there was an illegal conversion carried out on part of the building.  We had to take a call as to whether to purchase the property, as there were risks associated with the purchase if we were to go ahead.  There was another purchaser who had the contract already and was working their way through the paperwork to get to a position of exchange.  We happened to be the under bidders and also we only got the contract 3 days prior.  We took the decision to exchange on the property, as there was a risk if we did not move the other party would all of a sudden sprint to the finish line.  We managed to iron out all the issues with the property in time, and refinanced with a High Street lender.

We bought this property exceptionally cheap at £2.625M which worked out to £299 per sq. ft., selling it for £4.8M a couple of years later, after works.

With an illegal conversion of the property, it should be selling for a lot less, if of course the owner is serious about selling, as a buyer would probably be looking to go down a bridging route, until the issue has been rectified.  This involves risk and costs and perhaps even an enforcement notice from the council.

Another route to purchasing the property might be to work with the seller; and work to getting what’s known as established use for the 3 illegal flats.  This involves getting all the paperwork over the last 4 years and building a case.

If this lot went to auction it is doubtful it would achieve anywhere near the price being asked for.

It will be interesting to see what happens to this property.  We won’t be presenting this deal to anybody, but it’s always worth keeping an eye on it.

Suresh Vagjiani

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