Recently we have been tasked to find a development deal, with only £200K; not a lot of money considering you would be hard pressed to find a home for less than £300K anywhere in London. Hence, first time buyers are being priced out of the capital, £300K is about what a normal couple on an average wage can afford.
This means we have to search outside of London, perhaps way outside. Sometimes one gets very blinkered focused on dealing with London properties; there is a lack of appreciation on what’s available in other parts of the UK.
The London property market has become very heated, a small lot which we were looking to potentially acquire, was guided at £350K and went for £530K. This was a small, dingy lot, which had a tenant on the ground floor who was spread across two separate units.
The flat upstairs again was originally spread across two units, and was simply boarded up to be self-enclosed, consequently there was no access to the flat.
It was being sold by a property company, which was offloading due to the short nature of the commercial tenancy. Many property companies are now selling their blue chip covenant tenanted properties, as the leases are coming to an end, and the prospect of finding another tenant in the current climate is unstable.
What’s more is these types of tenants are not as strong as once perceived, evidenced by the way valuers are currently valuing them. There are many tricks employed by them to reduce the rent paid, such as entering into a Company voluntary arrangement which is a tactic employed by several companies in the recent past.
I honestly thought that given the size of the lot and the issues, it will likely remain unsold; on the contrary, it sold for 50% above the guide. The auction overall had a sales rate of 95%.
With the auction market in this condition it is difficult to find something with some margin on it; even if you do find something, at say 25% profit margin, if the market dips you will be wiped.
This is a realistic scenario in the current climate, reality has not yet hit the economy.
So, in order to seek a profitable development deal, we have had to seek elsewhere. The first point which needs to be addressed is the price of properties in the area, if they are not at a sufficient level, it will not justify building it out. The cost of build and materials will outweigh the market price. The second, is proximity to the station, and if it’s not in a town centre where does the train line feed into?
This is a basic start. A lot of information can be gathered remotely, but nothing beats feet on the ground, as the area needs to be understood. There will also be the logistical problems, builders and so forth. The other option is of course to obtain all the planning and resell the lot, leaving it for a local developer to finish the job off.
It’s interesting to see the opportunities available outside of London, when a commercial property becomes vacated the drop in value is very severe on the outskirts. For someone who is able to see the development angle the opportunity is even more lucrative. This will be an interesting and educational endeavour, we will of course keep you informed.