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The trouble with figures

Almost a week ago I was asked to see a flat in Dorset Sq, it was on a late Friday afternoon. The property was on the first floor of a period conversion, the ceilings were unusually high – I would estimate at over 12 ft. in height; it was south facing and had balconies, and access to the Square.

Two large floor to ceiling windows in the reception room gave a view to the square. It is unusual to find one feature in a property and this one had several. Moreover the service charge was only £1,200 per annum and the lease length was 92 years. I know of studio flats which have service charges of £3,500 pa and are kept in worse condition than this flat, so this service charge is very modest, especially when you consider it includes an element of building insurance as well.

However when we looked at the comparables the property did not look as attractive as it had at first glance. Many properties had been sold less than or around the same as we were purchasing the flat for. Two of the comparables were showing at around £1,000 Per Sq Ft. Other evidence was coming in at £1,200 per sq ft near the square. So on the surface this didn’t look so attractive. Certainly it didn’t seem it was a deal.

We were apparently purchasing at £1,200 per sq ft, so 20% over a comparable dated only in February this year. I say apparently because we were led to believe this was a 893 sq ft flat. It didn’t seem that way when we looked at the flat, the flat actually looked bigger.

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However things are never as they seem on the surface, on closer inspection there were reasons as to the low comparables; two of the properties were lower ground flats and the others were in purpose built blocks.

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So these are not actually comparables, as you can only compare like for like. Lower ground flats are avoided especially among foreign buyers which represent a large section of buyers in central London. I thought until recently this was because of the possibility of damp and security issues, however I didn’t appreciate the financial ramifications this has on the rental and the void periods of the property.

We currently have a situation where a client who has a lower ground property cannot rent this property because of the damp. He cannot simply do the works to rectify the damp as this is the freeholder’s responsibility, the managing agent will not do these works because they have not got the money from the other lease holders, and so consequently the flat is remaining empty until this sorry state of affairs gets sorted. And in the interim the landlord is losing rent.

The other comparables apart from the lower ground flats were from purpose built blocks and ground floor properties. A quick look around the square will tell you that none of the flats have the ceiling height of a first floor flat. It’s almost like you can fit another floor inside property. Many purpose built flats have a school hall type of feel about them, the service charges tend to be high and you do not see where the service charges are being spent.

Agents put emphasis on the sq footage of a property when selling, generally no mention is made of the ceiling height. The square foot area is measured but not the volume of the property which seems absurd as you can actually get another floor in and add mezzanine level balconies, this would increase the square footage.

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These are aspects you can only appreciate from visiting the property; the south facing view is also very important as this allows daylight into the property and this ensures the flat has a light and airy feel to it.

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The particulars hadn’t been done by the agent when we saw the property, we simply got a phone call and were told to come and see the property straight away. Through our connection with the agent we managed to secure the deal at £1.075m, £25k above the asking price.

The reason we had to go over was there was another agent on the scene, who had down valued the flat in order to secure it himself. Their floor plans suggested the flat was only 893 sq ft, however this looked way too low, the flat seems nearer the 1,000 sq ft mark. A 100 sq ft means the difference of £100,000 in this location. It seems the agent marketing this property had plans to down value it; unfortunately a common practice in this area.

This was a very difficult proposition for an armchair investor to take a decision on, as the comparable evidence doesn’t support the purchase. Two choices existed: either purchase the flat on our say so, or come out and see the property to understand the features.

We were confident this flat would make an excellent BTL investment, not in terms of yields but sheer capital growth. We expect this property will reach £1,500 per sq ft by December 2013 very easily – this is my prediction and one which I’m pretty sure of.

Property is in short supply in this location. Properties such as this are even shorter when you consider all the features this property has; perhaps ten properties around the block have only some of these features.

The property was in dilapidated condition, the high ceiling in certain locations had been lowered to provide storage, thereby ruining the natural features of the flat.

The flat can be made into a £1.35m flat very easily by spending £120k on it. However the value of this flat is not in the buy and resell but in the buy and hold. The location is heating up and the price here will rise quickly and strongly. The flat is minutes away from both Baker St and Marylebone stations.

We passed this on to a client of ours who was specifically looking for a buy to hold property. We spent last week securing the contract at our lawyer’s office and then we arranged one viewing over the weekend on the Saturday gone, and the monies for the exchange were promptly sitting in the lawyers account by Monday morning in anticipation of exchange tomorrow morning – hopefully!

The lawyers were working over the weekend in anticipation of an exchange on Monday morning. Their fees certainly reflected this, but in all fairness, if someone is giving up their weekend to close this for us they do need to be compensated.

The client’s background is property, so he knows a thing or two about a good deal. He also knows we know how to smell a deal and appreciates our local knowledge. He also knows the importance of speed when moving on deals. A property we sourced for him previously went up from £500k to £720k within a year and a half; this property was on the market for £500k and we offered full asking price. Despite receiving contrary opinions he decided to go with our recommendation to purchase this property.

This property in Dorset Sq although three bedrooms would show in much better light if the kitchen was shifted to one of the bedrooms. At the moment the kitchen adjoins the reception room, removing it and breaking the wall in between will mean the reception room becomes grand and has three floor to ceiling windows instead of two. This will allow more light and increase the views of the square, though losing one bedroom. However the features which it will bring out will far outweigh the loss of one bedroom. This also is not an area where cramming an extra bedroom will necessarily achieve a higher resell price.

This idea would be great for a resell but not necessarily for rentals. The rental market is different to the resell market. A one size fits all strategy will not work and will be very expensive.

If the aim is to rent, then the works should not be done. A large segment of the rental market is made up of sharers made up of say three individuals or couples who would share the otherwise expensive rent. The rental on this property would be about £850 per week – £1,000 per week dependent on condition and timing.

The yield would be enough to service the mortgage and a little more but not much. The plan for refurbishment to bring out the features would be executed at the time of resell not whilst the property is being rented.

If this was done the amount spent would not justify the increase in rental, and the property would also lose a bedroom.

Decision making and speed are two of the characteristics which separate the investors who make money and those who do not. That is not to say they always make the right decisions, but they do not procrastinate and sit on the fence when a deal is brought to them.

I have seen more people losing money by not making a decision than making the wrong decisions when purchasing property.

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Investing in bricks and mortar means the investment is real, hence it cannot simply disappear, like non tangible investments such as stocks and shares.

Make sure you get the right mortgage while flipping properties otherwise you will end up paying big penalties when you sell quickly.

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