When time is ticking and the price starts reducing
13th August 2019
We spent a large amount of time on a deal in Willesden High Rd. The property is part commercial, and part residential. The residential component is ill arranged. They are rented as four 4 bedroom apartments and one 2 bedroom apartment. This property has been clearly neglected, it seems by someone who bought it several decades ago, when Willesden was a less desirable area. Not that you would necessarily describe it as desirable now.
From a property investment perspective, it’s not a cheap area, caused by its proximity to central London and transportation links. The starting price of a flat here is £350K. You can be in Baker Street from Dollis Hill station within 15 mins.
The deal was interesting, as the property is producing a yield of 5.6% from the outset. The benefit of this is two-fold. One: the property is mortgageable, with a reasonable ‘High St’ rate. Two: the pressure for getting planning, and reselling is reduced.
Planning has many variables, moving parts, and its own timelines; therefore, trying to predict this is sometimes like asking how long a piece of string is.
To give the developer more security in this regard, one could opt to only go for planning which falls under permitted development. This is a clearly laid out policy which means you do not have to go through the full planning process. It is a more streamlined process, which has to be granted within 56 days. It cannot be however be automatically assumed. It requires adherence to certain processes and procedures. A more accurate description is that it is a more tightly defined planning process.
The most known criterion under permitted development is the conversion from office to residential. This has been followed so aggressively in certain locations that the opposite started to occur; meaning there became a lack of office space, leading to an increase in office prices, leading to many developers doing a U-turn on the schemes they had just got planning for and turning them back into high grade offices! There are many other less well known conversions which the permitted development rules cover.
I know of investors who only focus on deals which fit under the permitted development banner, as it strips away much of the variables associated with planning deals.
With this property having an income it takes the stress out of the time taken for planning, as there is an income coming in on a monthly basis. The amount of money tied in the deal is also minimised.
The intention was to develop 16 residential units on this site through a combination of remodelling the existing properties and creating new build ones too. The end value once developed would be in the region of £6.2M. The purchase price was quoted as £2.4M. However, as time started ticking the price started reducing.
This property was being flipped by someone who was very fortunate to have picked it up for £1.8M. The idea was for the incoming buyer to take over his contract, making the original buyer a handsome profit of £600K on an investment of £180K within a month.
Instead, as the completion day approached the price reduced to a whisker above what the original buyer paid. In the end the original buyer completed.
This was a great deal for the reasons outlined. By the time planning comes through the market hopefully would have picked up putting the wind in the sales for this deal.
Given the market, many investors don’t like the idea of being flipped to. This is a psychological barrier and not one steeped in reality.