Profiting from short sight

There’s a very interesting property which has come across our radar; interesting not from the view of architecture or aesthetics, but from a profit angle.   It seems to tick all the boxes, almost in a formulaic manner.  It generates income whilst the planning is being applied for, it’s an easy building to work with, it’s close to a station, and there’s an added planning angle which can be applied for once the main planning has been obtained.   

The property is let to a high street retail company, with an excellent balance sheet.  The lease is expiring next year, which gives just about enough time to obtain planning; both the main planning and the enhanced planning.   

The vendor is a UK fund, which fits the profile of why they would want to dispose of this type of stock.  This kind of property is purchased in the same manner one would invest in a bond.  It’s a yield play; the income is far greater than the cost of capital.  They look no further than this.  Perhaps this could be described as their short sightedness, or perhaps not.  Therefore, when the yield looks like it’s going to end, there is no use for the investment.  And they dispose of it. 

The property has been guided at £500K, and has an income of £70K which represents a very attractive yield of 14% of the guide price.  The term of the income is just enough time to get planning over the line.   

The property is freehold, with a commercial tenant occupying the ground and first floors, with a separate tenant occupying the second floor.  The property is made up of three floors in total.   

Converting the building into residential should be straightforward process.  The potential to add a mansard also exists, making the building into four floors in total.   

Ignoring the potential for the mansard, the property when developed into flats would have an estimated end value of £2.4M, with a development cost of about £750K.   

Even at a purchase price of £800K, assuming a deposit of £400K, this represents an extremely high return, within a defined period and all the while there is money flowing in.  Inevitably, there will be speed bumps on the way, this cushion of return allows one to cross them with confidence, despite the deal looking like it is all lined up.   

The aim would be to refinance and hold the deal, benefitting from the positive monthly cash flow.  The property is close to a station and so the void period should be very small, and the rents should rise with time.   

We are looking at a very turbulent 2023.  Therefore, there is no guarantee that the price of properties will be stable, they may even decrease.  Whenever this occurs rents tend to increase.   

In order to insulate from the turbulent times ahead we would be looking to refinance on a 5 year fixed rate on this deal; as the only security which can be relied upon is the monthly cash flow, and that too will be fully insured.

Suresh Vagjiani
Suresh Vagjiani
Articles: 819