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When the numbers speak for themselves

15th January 2019

This weekend I went to see a property in the South-East of London.  The deal has already been done, contracts are in and the solicitors are doing the conveyancing, which incidentally means the transfer of legal title of property from one person to another.

The property is a ground floor two bedroom flat, in a purpose built block, built approximately 20 years ago and a stone’s throw away from a Crossrail station.  Crossrail has been delayed, partly due to extra funding requirements.  From an investment perspective this means the window of opportunity will stay open for longer than expected.  When Crossrail finally starts here, Canary Wharf will be 11 mins away from this station and the West End only 22 mins away.

The rents will rise, and so will the capital values; generally, the latter rises faster.  This always results in dampened yields.  Central London is a prime example.  A client of ours has a flat which was purchased for £3.07M, in prime central Mayfair.  The weekly rental is £1,000, giving a yield of 1.6%.  After you take off the hefty service charge and the mortgage, there isn’t much left over.

This paltry yield is revealing.  It shows a steep rise in capital values relative to the rentals.  In other words, rents have not kept pace with the rise in property prices.

The condition of the £245K property I went to see was at the other end of the scale.  On inspection, the property needed a touch up, but nothing to break the deal.  The tenant had been there for ten years, and was paying £1,100 per month.  He truthfully told me the market rental was about £1,300 per month.

The yields surprised me.  At the market rental of £1,300 this comes to a yield of 6.36%, and even at the current rent the tenant is paying this comes to 5.38%.

These are exceptional yields and they are testimony to the fact that we are buying extremely cheap.  This location is not in the north of England where numbers even higher than this are prevalent.  This area is in London, and in a location which we believe will be the fastest growing area in London in years to come.  This conclusion is backed with 18 pages of research.

With these kinds of yields you would usually be entitled to the full Loan to Value of the mortgage.  Lenders often say they will lend 75% of the property value.  However, this is on the proviso that the rental cover of 125% or 145% is met.  What this means is if the mortgage is £1,000 per month the rent has to be £1,250 or £1,450.  Given in London the rents are so low, in reality it is this which governs the amount one can borrow, and not the Loan to Value.

In this situation, given the rental is sufficient, the deposit required is only £61,250.  It is difficult to invest such levels of funds in property in London, with this level of yield and future growth potential.

Suresh Vagjiani

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