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Trade or ride the wave?

In the last couple of weeks we have closed three deals with a view to trade them prior to completion. One of the properties is a purpose built flat for £240,000, which will be sold in auction on the 17th April 2013; another is for £275,000 which is a conversion and a probate sale which we expect will be resold shortly for £310,000; and the other is a bigger freehold property in Shepherd’s Bush for £715,000 which we are expecting to resell for£825,000.

The Shepherd’s Bush property is interesting, Shepherd’s Bush is not a market I know intimately hence I had to rely on past sales figures; the past sales figures did not look very promising to me as the last sale occurred in December 2012 and the price was not much different to what we were about to pay for this so called deal, the previous figure in June was also at a similar level. I was not seeing the deal, yet the agent involved assured me this was a deal and we must purchase the property.

‘The figures are out of date’ he exclaimed, ‘and the market has heated up aggressively’. I have experienced this, where you purchase the property at market price purely because you know there is no decent stock around and the demand is very strong, this means in the coming months you will experience a strong rise. This information does not come from the internet or past research but reading the signals from reliable sources.

In one sense all past performance is an indication of is past performance, this does not necessarily indicate where price will go in the future. If you can read the currents on the ground this will give you a stronger indication. We once purchased a property for a client in 33 Davenport W2 for the full asking price of £495,000 on this basis a year and a half ago, the property is currently worth £700,000.

Luckily in the same week we were agreeing this deal we received an offer in Shepherd’s Bush for a two bedroom flat we sourced for our client for £380,000. In fact we had sourced the whole block consisting of three flats early last year for £650,000, we purchased this as part of a portfolio. The properties were on the market for £250k , £250k and £375k (the two bed), giving a total of £875k.

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The highest offer we got for the two bed when we put them on the market was£315,000, so to receive an offer at over the full asking price clearly was a sign from the gods for us to purchase this deal . This gave us the impetus to exchange on the deal. Shortly after we exchanged we received an offer for £800k!

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The point to note with all these three deals is not that we have purchased them at good prices but they have all been exchanged with the intention of selling them on prior to completion.

The combined purchase price comes to £1.23m, and the potential total sale price will be £1.41m giving a gain of £180,000. This will be on a combined exchange deposit of £123,000. So the percentage gain is 145% within a month of exchanging.

This looks like a good percentage return when you calculate the percentage return or the Internal Rate of return etc, but it is deceptive.

When you exchange on a property you must be prepared to complete, unless you’re willing to gamble the whole amount away if you cannot resell prior to completion. This means you will need the other 90% of the money either in cash or through funding, therefore although this money is not used actively in the deal, and perhaps it never will be, it needs to be in place.

This means the returns above are skewed and not as high as they look, as although the money is not used in the deal, and hopefully will never be, it needs to be blocked somewhere in case completion occurs.

However trading before completion does have other benefits. One is the stamp duty saved, in the case of the property in Shepherd’s Bush this will be nearly £30,000, on top of this you will save on the other costs associated with completing and then selling, for example the arrangement fee for any funding taken out as well as a redemption penalty. On the assumption of 70% funding and a 3% arrangement and exit fee you’re looking at another expense of around £15,000; thus with the trade you would be saving about £45,000 of expenses which would have otherwise eaten into your profit.

We use a combination of approaches: sometimes we trade deals, other times it pays to sit and ride the wave as it is rising; and of course there’s developing and adding value to the property as an option too.

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Currently we have a very lucrative deal available in a prime part of London, this is a development which was started but then frozen due to the owner having other commitments. We have agreed the purchase price at £3.25m and another £1.5m will be required to finish the development. The end value conservatively is expected to be £6.7m and the build time expected is 12 months.

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If we make an assumption of 50% gearing for this development the total comes to £4.75m, the cash funds required to purchase and develop this will be about £2.375m; this will give you a return of approximately £2m within a 12 month period. Of course we haven’t included contingency and stamp duty etc to keep things simple, but to counteract this the price of £6.75m is unreasonably conservative, furthermore we believe this is an area where you will be riding a wave. There is upward pressure on prices in this spot, whilst the build will be happening the prices will be rising month on month.

Once developed there are other options than simply to resell this development. The flats can all be remortgaged individually to extract 75% of the value, assuming the final value of £6.75m extracting 75% means you get just over £5m, so everything you have put into the deal; and you will have a bunch of properties providing a rental income and rising in value for you in the future.

So if the current crises in Cyprus has scared you and given you the impetus to take control of your funds rather than keeping them in an institution which is riddled with fraud at its core and at its highest levels, property in Central London is a safe environment to place it. This is why money from over 63 countries is pouring into the Central London market. Cyprus will be an impetus for many to ship their funds to the London property market.

By the way, did you know….

Property Funds – Returns without the hassle of direct ownership

  • Investing in property directly may not suit everyone
  • There are funds offering returns of 15% to 20% in the market
  • This means you get a decent return without the hassle of owning a property
  • This beats the returns offered by banks and many other financial products
  • Underneath it your money is secured by property in a strong location
  • There is a reason why banks are still prepared to lend 75% of a property value in this climate, because they know it is a secure investment
  • Many funds are protected with external auditors and fund managers, this means your funds are kept as secure as possible

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Budget 2013: Under the “Help to Buy” program, buyers will only need a 5% deposit, with the government investing 20%, which will be repaid when the property is sold – worth exploring if you’re short of deposit.

Remember to keep a contingency when renting property, for emergency works and rent arrears etc, this could affect your credit history if your mortgage payments are late

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