Using the right lens

I’m due to see a couple of properties this week, on the other side of London.  I have seen them previously, the best part of a year ago.  This was when the agent was not instructed, the vendor was just fishing around.  However, due to our relationship the agent gave me the heads up and I carried out an informal scout of the property.  They have both now come on to the market.

I will be visiting them in a few days.

For one of them, Foxtons, who do some good research on local areas have advised the blended price of the locality is about £840 per sq. ft.  The opportunity which has been presented to me is a stone throw away from this location, but close enough to take these numbers into consideration.

The deal is to be sold at a blended price of £276 per sq. ft. this leaves a good margin between the entry price and the end value.  The objective is to transform the property from one to the other, with minimum cost involved.  This too in an environment where property prices are looking wobbly and finance costs have increased substantially relative to what they used to be.

Therefore, this deal needs to be based on a buy, develop and hold basis; as banking on a resale may not be the wisest exit.  In my opinion this needs to be a yield play, where the finished development is yielding a solid income month on month, based on the rent flow.

This could mean this deal is only slightly leveraged, to avoid a high Loan to Value, and thus the high monthly cost associated with it.  This will also keep the deal well under the radar of the lender, if they ever look to call in loans.

Most will shy away from doing a deal in the current environment.  This is when the real deals will start to surface; when there is a lack of ready buyers.  Those who are cash rich and focus on the bigger picture will profit in the coming times.

There are a number of metrics to measure a deal upon, not just one; such as the return on the cash used in the deal, the internal rate of return etc.

This deal would require a large proportion of cash to be buried into it, perhaps with no possibility of retrieving it back out in the short term.  Therefore, what needs to be looked at is how hard its working for you while it’s buried in the deal.  This will also stop one from moving on to other deals, all the more reason for a solid month on month return.  I would look for the money which has been buried in the deal to return at least 25% per annum.  This will be by adding value and renting the whole building out.

We refinance and release cash when things improve, assuming they do.  Otherwise, we simply hold on to the high performing asset, not a bad position to be in.  This deal is priced at £2M.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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