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Profiting from uncertainty

10th March 2018

This week, again we are presented with an opportunity to purchase a load of short lease properties in prime central London.  We have bought several properties already from the agent, most recently our client completed on a property which was in a contract race.  After having a failed sale, the seller wanted to be sure the next buyer will perform, so, he decided to put two horses in the race.  This only made me more keen, and it often sharpens the lawyers when there is a race.  From the outset we knew our lawyer could perform as it was a cash purchase.

We did win the race and the other party ended up with only legal bills.

On the current deal the variables are simple really – on the surface at least.  One is the purchase price, and the other is the cost of the lease extension.  Negotiating the purchase price is relatively easy.  Just go as cheap as possible.

Some buyers even assess the desperation of the seller, and when this is ascertained they try to chip the price just before the exchange.  A desperate seller will be forced to accept.  However, this is not good practice, as word travels fast, and if you hope to do more deals this is perhaps not the best reputation to have in the market place.

So, in ascertaining the purchase price, it’s a question of bargaining.  The lease extension costs on the other hand, is where another angle opens up.  This is a negotiation which is based on facts and formula, but ultimately comes down to negotiation.  The premium payable to the landlord is, keeping it simple, half of the gain in value by extending the lease.

What’s bizarre is the amount someone pays for a short lease is hugely variable.  The biggest reason for this is psychology.  Humans are more prone to fear, and therefore when there are any variables involved they are likely to be irrationally pessimistic.  Short leases involve variables, and most investors don’t like this.  In a market where there is too much information flow, finding angles to exploit get smaller and smaller.  However, this is one, a comparable short lease was sold recently for nearly double the price of what we are getting the deal for.

This could be just a freak occurrence, but this kind of variation doesn’t happen in the property market, 10-20% is an acceptable variation.  Therefore, this could mean we are purchasing extremely well, conversely, it could mean the other buyer has over paid.

Currently, the environment is a good one for lease extensions, due to the uncertainty of what affect the Brexit negotiations will have on the property market.  Uncertainty is good, it gives astute investors an opportunity to exploit the market, a rarity given there are no entry barriers for agents and entrants alike.

The market gets over crowded with buyers at the bottom of the pyramid.  The only saving grace is now due to price restraints it’s not as open as it once was.  Actually, this is not a reflection of price but one of credit.  Credit was abundant, and based on nothing but clean credit and the valuation.  Note, it was valuation this was based on and not the purchase price, on occasion no deposit was even required.

If you like the flavour of this deal, call the office now and we’ll tell you more.

Suresh Vagjiani

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