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The trouble with going bald

Last week I was invited to see a large newly developed property in Esher, Surrey; it was on a golf course. The property consisted of 13,000 sq. ft., a swimming pool, cinema room, wine cellar, car port and the usual bells and whistles you would expect for this type of property.

The price tag was £12m. I don’t know the area but the price seemed ok for what you’re getting. It all looked great enough as you would expect for a property of this calibre. However there were some fundamental flaws, in my mind it wasn’t perfect. And perfection is what you would need or at least be close to when you’re dealing with a discerning buyer at this level.

Firstly the grounds did not do the building justice they were proportionally too small, not what you would expect for a property for this size. The bedrooms, apart from the master bedroom which was very plush, were small and almost the same size as the servants’ quarters.

The architect involved in the project was very involved, perhaps too involved, meaning he had a story as to the reason why he had designed the building this way, he also had an agent who bought in to his story and therefore was deemed the right agent for this property in his opinion.

The story went above my head; it was that the property was designed as a neo-classical as opposed to a conventional house which had been refurbished.

The issue is that unless you really buy into this story, which the agent did hence he got the agency, the house doesn’t really sell itself.

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The proof of the pudding is in the eating; the property has been on sale since February and has only had one firm offer for £10m which was refused because this was the actual cost of purchase and development. Since then there have been no offers. It is appreciated properties like this take time to sell but I for one wouldn’t hold my breath for this one, the price tag is £12m.

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I have had a little experience in Bishops Avenue, properties there can take some years to sell. And unlike smaller less valuable properties you cannot rent them in the interim, they also have full time security guards to look after the property whilst it remains vacant. If these properties were to be used they would lose their appeal and not be able to command the premium price they are on for in the same way a brand new car is able to sell for a large premium.

The owners of the Esher property in retrospect now wish they had taken the previous offer and cut their losses. However the previous interested party has gone on to purchase something else and there doesn’t look like there’s anyone else on the horizon. This property does not look like it will sell any time soon. It seems to me the architect is the only one who loves the property since it is his baby; the issue is he hasn’t got the £12m to purchase the property.

A similar scenario unfolded in a freehold mews house in Kensington some months ago. It was like a Tardis from Doctor Who, with three floors above the ground and another three floors sub ground level. The swimming pool doubles up as a dance floor, at the press of a button the swimming pool floor rises to floor level. This property was on the market for £21m originally then it dropped to £16m and then dropped to £13m.

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The developer had got things badly wrong. It was a house which should appeal to families yet was designed to appeal to a bachelor/footballer. And in fact it was a footballer who popped up to see the property whilst I was there, a division one player who used to play for Tottenham Hotspur, even he didn’t bite the bullet, hence the property was repossessed and then sold for £11m by the bridging company, who presented the deal to me some months later independently.

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The other issue is foreigners especially do not like living beneath the ground, you can get away with one level below ground but not three.

The risk with doing deals in these locations at this level is the debt may kill the deal, as the time taken to sell will be long and the finance cost will increase as time goes on.

Even if it is assumed there is 50% debt on a price of £13m the cost of serving the debt per annum will be £260,000 at 4% per annum. In effect the price of the property needs to increase at this level in order to sustain the debt cost.

Therefore property investment is not looking so good at these levels.

Interestingly a property came up only last week in the prime road of Bishops Ave, it used to be on the market for £100m back in 2011, then the price was slashed by £35m to £65m, and if that isn’t cheap enough then you can get it now for a mere £27m.

The property consists of 27,000 sq. ft. on a surprisingly large plot of 2.5 acres, which is huge given the location. Normally on a plot like this the developer would chop the land into 5 pieces and sell 5 individual properties rather than one monstrous one. I haven’t been to see the property but the pictures and the backers tell me this is top finish, which would normally cost in the region of £350 -£500 per sq. ft. to develop. Therefore given the size of the property and the substantial grounds £27m is cheap. The property known as Heath Hall was originally designed for William Lyle from the Tate & Llye family back in 1910. The property has been restored by the well-known property entrepreneur Andreas Panayiotou’s Ability Group.

There’s a saying which I’ve quoted often and used to defend the nature of property as an asset class: “buying a dud property is like having a bad haircut, if you wait long enough it always grows back.”

Well in this scenario it doesn’t quite work out, hence I have had to revisit this important thesis and re-amend the rule, here’s the additional sub clause to the rule:

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“Buying and developing an expensive property can be like going bald, it may never grow back no matter how long you wait!”

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In the defense of all of the above it is not just the out of place property design to blame but equally the debt level which would have served to push these deals over the edge. When debt is mounting you cannot wait indefinitely to release the profit, there are time limits. This was especially exercised with malicious intent during the credit crunch. If there was no credit to be crunched these properties may have sold……in time.

The Real Deal 

Victoria, London, SW1V Purchase Price: £2m

  • A beautiful house in this highly sought after location
  • Freehold
  • In its current condition this property is priced at £1,032 per sq. ft., properties in this location are being sold above £1,200 per     sq. ft.
  • The amenities of Pimlico and Victoria are close by while the shops, bars and restaurants of Chelsea’s famous King’s Road     are a short walk away
  • The end value of the property after works is expected to be above £2.6m

Call us now to secure this deal!

Suresh Vagjiani

Sow and Reap

A Property Investment Company

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!Tips of the Week 

Remember, the easiest way to avoid capital gains tax is never to sell! You can always extract equity from property by way of a refinance.

When using mortgages for trading deals, more emphasis is often placed on the arrangement and exit fees rather than the interest rates due to the short nature of the loan.

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