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To trade or not to trade

Tomorrow we are – hopefully – exchanging on a property we ourselves had exchanged on a couple of months ago. The purchase price was £1.85m and the resale price is £2m, the time period was roughly two months. The property was never completed, merely exchanged, meaning we only parted with £210k, and this was all that was required.

It was anticipated we would never complete this deal, it would sell prior to completion, purely due to the amount of margin left in the deal. However our analysis is not always correct, otherwise this would mean we have the ability to see through time. On the occasion we have had to complete we have to stand ready with a loan in place, which is an unnecessary expenditure of several thousand pounds in one sense, and in another it is our insurance policy.

The property is a freehold house in Victoria, with an end value of £2.7m (yes, plenty of margin!!).

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The incoming purchaser has just divorced and is using the money from her settlement to purchase this in cash, without the need for a mortgage. To find a property with this amount of margin given the location is rare, I’m sure in time it will be seen she has invested her share of the proceeds very well.

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We’re in the process of tying up two more buildings which are coming up close to Hackney, an area I know reasonably well. My brother had a post office in this location many, many years ago and consequently under duress I was forced to train as a relief post master so that I was able to run it over holiday periods. The area was filled with DSS claimants and immigrants mostly from Bangladesh and Turkey. This of course was very good from a Post Office point of view, as the more the claimants the higher the salary. This was going back 20 years! During my time there I had witnessed a great many things, including a shooting which resulted in a team of paramedics being flown in by helicopter in the main street to try and operate on the victim; and fraud by the public in the post office was a common occurrence. I also had a spell of living there whilst at university, this meant I could cycle in from this close location to Angel. I did, until by bike got stolen -twice I might add! Only then did I buy one from Loot for £40 so the next time it happened it wouldn’t be so painful.

Since this time parts of this borough have changed drastically, the prices of property have risen dramatically. Though the area was a potpourri of immigrants with blocks of council houses all around and a hereditary culture of benefit claimants, there was a saving grace, its location. The area is close to the city, one bus ride will take you into Liverpool Street station with Old Street and Barbican stations being in close proximity.

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This is the one saving grace which has ensured the price in this location would increase, despite the various factors which weigh it down. This demonstrates the most important factor Location, Location, Location is still the overriding factor when investing in property.

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We will be purchasing two large houses in this location for £2.25m together- which is cheap. The end value is expected to be a minimum of £4m developed. So again there seems to be a trade in this, I’m pretty sure someone will buy this deal from us at £2.5m quickly netting us and our investors a tidy profit. However, are we missing the real value of the deal by grabbing that which is closest to us?

Perhaps the real value in this deal is to hold these properties and allow them to mature like fine wine. Are we going against the grain of property investment by exiting the deal too quickly, merely picking up the crumbs and missing the cake?

Certainly our investors will be happy with the short and quick return, most people like the security of having their money under their control and having it back quickly. Furthermore we will not have to get our hands dirty to get this gain as well as paying for stamp duty and interest costs, it will be clean.

The other point of view is this is still an area which seems to be rising due to its close proximity with the city. If we complete the deal and the end value is £4m a modest yearly rise of 3% in price means a gain of £120,000 on a continuous basis, on average I don’t think this would be an unreasonable assumption.

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What’s more is if we line up our ducks correctly we may be able to extract most if not all of the initial capital put into the deal. This would be after a 6 month period in order to extract at the valuation and not the purchase price, which in this scenario is not an issue as it will take this long to develop the property in the first place.

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On the assumption the work to chop it into flats costs in the region of £750k, our total cost for the deal would then be £3m. As individual flats we should be able to release 75% of the valuation of £4m, this would mean £3m is then released again whilst the property is doing what it does best – going up passively, whilst paying the mortgage with the rent. There will be some money stuck in this deal but it will be a nominal amount as we have ignored fees like stamp duty and interest cost.

There are pros and cons to both scenarios, with trading you cannot expect trading deals to come regularly, at times it seems they’re like buses, when they come they come two in a row. The other point which sticks out is when wealth is in the form of cash in a bank it degenerates, in a property it produces – typically; both in terms of growth and yield.

The Real Deal

Mayfair, London, W1 Purchase Price: £3.5m 

  • A large three bedroom flat in this highly sought after location
  • Long lease
  • Very quiet flat
  • Around 1,550 sq. ft. area
  • Properties on this street are being sold for around £3,200 per sq. ft. while this is coming at around £2,260 per sq. ft.
  • Very good long term buy and hold opportunity

Call us now to secure this deal!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Many business owners use property as their insurance policy when they fall into tough times in business, dipping into property has been their saving grace.

The mantra for property is always Location, Location, Location! Property in a good location will attract quality tenants and strong capital growth.

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