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The Winning Horse

28th July 2020

In last week’s article, I mentioned a deal where we were preparing to exchange, and then another purchaser was issued with a contract, meaning we ended up in a race.   

  

In the current climate, the choicest deals attract attention; buyers become more choosey with the type of deals they do.   

  

Thankfully our client exchanged on the deal last Friday, with completion set for early September with some helpful haste from our appointed solicitor.  

  

The deal is in Cricklewood, and was purchased for £600,000.  It consists of a shop and uppers and has a yield of 6.4%.   

  

The property is on a corner plot and there’s potential to build at least two stories up and push out the mansard.   

  

This, we estimate, will add a further 750 sq. ft. which equates to about £450,000 of value; bringing the end value of the property to in excess of £1M.    

  

We will commence with the planning process now, there is no need to wait for completion.   

  

Strangely, you don’t need to own the building to apply for planning.  You could, in theory, apply for planning on someone else’s building.   

  

I feel there are a few more angles with this property which need further exploration, which could potentially add even more value to the project, using PD rights.  Here, we will look to convert the rear of the commercial property into residential.  As it’s a corner plot the building is well placed for this in terms of access and it would blend nicely into the local street.   

  

Our client’s intention is not to buy and sell; it is to add value and then aim to extract the initial investment via refinance, and keep the site as a cash generator, and keep building the portfolio.  

  

The property will be funded by a commercial mortgage or a cheap bridge.  There’s a very interesting mortgage product which gives the borrower the security of a 5 year fixed rate but only the penalty of a 2 year rate.  I have never come across this previously, normally the penalties are in line with the length of the product.  It would be a difficult product to structure for the lender, as when they issue a 5 year fixed mortgage product it would be hedged against a 5 year borrowing from the markets.   

  

Depending on how quickly this investor wants to get on with the project, being tied even for 2 years may or may not suit this project.   

  

The other option is a bridge, which should be pretty much covered by the existing income generated by the property.   

  

When doing development projects they require the utmost caution, a deal is only as good as its weakest link.  

   

We are excited to be working on this project with our client, and look forward to updating you on the progress.

Suresh Vagjiani

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